VEGA: 1st Quarter 2021 Portfolio Manager Review
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/vega.
|1st Qtr. 2021||YTD|
|MSCI AC World Index||4.57%||4.57%|
|Cboe S&P 500 Buy Write Index (BXM)||5.73%||5.73%|
|Bloomberg Barclays U.S. Aggregate Bond Index (AGG)||-3.37%||-3.37%|
As of 03.31.2021.
While the markets remained steady overall, the first quarter of 2021 saw equities continue their upward trend that started in late second quarter 2020, and fixed income started to soften and begin a downward trajectory. U.S. equites outperformed developed international equities – the S&P 500 Index had performance of 5.77%, while MSCI AC World Index only gained 4.57% during the first quarter. These overall trends were reflected in the performance of VEGA’s underlying securities, and therefore VEGA’s overall performance.
The U.S. small cap area, as represented by the iShares Russell 2000 ETF (IWM) in VEGA’s portfolio, had the best overall quarterly performance of the underlying holdings with a gain of 12.90%. Since VEGA did not have exposure to IWM until the end of March, IWM did not contribute significantly to VEGA’s overall quarterly portfolio return. The other notable standouts for positive performance during the first quarter were the Communications Service Select Sector SPDR Fund (XLC) and the SPDR S&P 500 ETF (SPY) with returns of 8.84% and 6.35%, respectively.
As noted above, fixed income did not fare as well as equities during the first quarter. The largest negative performance attribution was seen by the iShares Core Total USD Bond ETF (IUSB) and U.S. treasuries represented by the iShares U.S. Treasury Bond ETF (GOVT) with negative returns of -3.30% and -3.71%, respectively. Since these positions were added to the portfolio in late March 2021, VEGA did not experience the same declines.
|Ticker||Security Description||Portfolio Weight %|
|SPY||SPDR S&P 500 ETF TRUST||35.20%|
|EFA||ISHARES MSCI EAFE ETF||16.87%|
|EEM||ISHARES MSCI EMERGING MARKET||7.02%|
|GOVT||ISHARES US TREASURY BOND ETF||6.96%|
|IWP||ISHARES RUSSELL MID-CAP GROW||6.15%|
|IUSB||ISHARES CORE TOTAL BOND ETF||5.97%|
|IWM||ISHARES RUSSELL 2000 ETF||4.15%|
|IXN||ISHARES GLOBAL TECH ETF||4.06%|
|LQD||ISHARES IBOXX INVESTMENT GRA||4.01%|
|XLK||TECHNOLOGY SELECT SECT SPDR||3.00%|
As of 03.31.2021. Cash not included.
Covered Calls: The covered call writing done in the first quarter of 2021 was fairly unexciting compared to the covered call writing done throughout 2020. During January, February and March, all expiring covered calls expired worthless. This allowed VEGA to pull in additional premium from selling the covered calls. It is worth noting that VEGA continues to write covered calls with a delta of 0.30 or less. Deltas are considered a measurement of the likelihood of assignment prior to expiration. A delta of 0.30 translates roughly to a 30% chance of assignment from the time the covered call is written to expiration of that covered call.
Protective Puts: Going into 2021, VEGA had protection on 10% notional value of the overall portfolio. This was because protective puts continued to be richly priced compared to covered calls after the massive spike in volatility during early 2020. During February’s expirations, an additional 10% notional value of protection was added to the portfolio as the volatility continued to abate to typical levels. At the close of the quarter, VEGA still maintained a 20% notional exposure of protection.
Tactical Shifts: VEGA participated in several tactical shifts toward the end of the quarter. The largest overhaul came in fixed income. VEGA moved out of ultra-low duration holdings and into intermediate duration holdings. The positions held for the fixed income allocation of the portfolio at the beginning of the quarter are reflected below.
|AGG||ISHARES CORE U.S. AGGREGATE||3.50%|
|LMBS||FIRST TRUST LOW DURATION OPP||3.50%|
|IGSB||ISHARES 1-5Y INV GRADE CORP||3.50%|
|JPST||JPMORGAN ULTRA-SHORT INCOME||3.50%|
|MINT||PIMCO ENHANCED SHORT MATURIT||3.50%|
After the tactical shift the new fixed income allocation was updated to the below.
|LQD||ISHARES IBOXX INVESTMENT GRADE||4.00%|
|GOVT||ISHARES US TREASURY BOND ETF||7.00%|
|IUSB||ISHARES CORE TOTAL BOND ETF||6.00%|
This tactical shift for fixed income increased the duration from approximately 2.31 to 7.10 and reflects an increase in risk exposure to fixed income. In addition to moving up duration on fixed income, VEGA added back exposure to mid and small cap U.S. equity via the iShares Russell Mid-Cap Growth ETF (IWP) and IWM. IWP and IWM now have target allocations of 5% and 6%, respectively.
Lastly, developed international equity exposure was increased from 8% to 17% and the Xtrackers MSCI Europe Hedge Equity ETF (DBEU) was removed from the allocation. International exposure is now represented exclusively by the iShares MSCI EAFE ETF (EFA). Alongside the increased developed international equity exposure, emerging markets were reintroduced into the portfolio increasing from 0% to 7%. This marks the first time emerging markets have been in the VEGA target allocation since the brief re-entrance into the iShares MSCI Emerging Markets ETF (EEM) in mid-February 2020.
Volatility-Based Reinvestment (VBR): There has not been a volatility based reinvestment since March 2020. Going into January, the 200-day moving average on the CBOE Volatility Index (VIX) was 30.13. There will need to be a significant increase in the VIX before deploying another volatility based reinvestment. More specifically, VEGA will wait for the 200-day moving average to double, which means spiking to a value of roughly 60, before putting cash back to work in the portfolio.
Beta: As VEGA closed out the first quarter of 2021, the beta of the portfolio was approximately 0.71 when compared to the S&P 500. This is a larger than typical deviation away from a long-term target beta of 0.60. Given the continued strong performance in equity markets coupled with the introduction of vaccines to the broad population and reopening of many economies, there is a strong economic outlook going forward.
After a volatile month, the S&P 500 finished at a record high when the markets closed on March 31st. The index finished the month up 4.24% and is now up 5.77% on the year. As the economic recovery continues, the Dow Jones Industrial Average led the monthly performance numbers as it finished up 6.62% and is now up 7.76% on the year. The technology heavy NASDAQ finished the month in positive territory, but it continues to lag the other two indices after outperforming both in 2020. The index finished the month up 0.41% and is now up 2.78% on the year. Small cap stocks continued to inch higher as the Russell 2000 ended the month up 0.88% and is now up 12.44% on the year. The MSCI EAFE index is up just under 3% on the year after a positive month, however the MSCI Emerging Markets index fell 1.70% during the month and is now up 1.95% on the year. The Bloomberg Barclay’s U.S. Aggregate Bond index fell 1.25% in March and is now down 3.37% on the year.1
|Index Returns (as of 3/31/2021)||Closing Price Level||March||QTD/YTD|
|Dow Jones Industrial Average||32981.55||6.62%||7.76%|
|MSCI Emerging Markets||1316.43||-1.70%||1.95%|
|U.S. Aggregate Bond||–||-1.25||-3.37%|
As has been the case for much of the last year, the economy is shaped in large part by the pandemic and our country’s policy response to challenges that have come to light because of the virus. The first quarter of 2021 was one of transition. There was the transition in the White House and on Capitol Hill, and towards implementation of the Covid-19 vaccine. The transition in Washington, D.C. will dictate our country’s policy response to the virus while the vaccines have taken center stage regarding the pandemic.
Since March of 2020, the economy has experienced a massive drop followed by a surge and we continue to inch forward in our new social distancing driven economy. Final numbers for GDP growth in the fourth quarter of 2020 came in at 4.3%.2 The month of March closed with strong economic numbers and estimates for first quarter GDP growth are now at 6%. GDP numbers are seasonally adjusted annual rates. In March, personal consumption growth increased from 5.6% to 6.9% and private investment growth increased from 2.4% to 6.9%.3 The ISM Index also reaching its highest level since 1983 as it climbed to 64.7 in March, up from 60.8 in February.4 Goldman Sachs now estimates GDP to finish the year up 8% year over year which would signal a full recovery to pre-pandemic levels. For reference, U.S. GDP has not grown 8% in a year since 1951.5
Nonfarm payrolls increased by almost 1,000,000 in March and the unemployment rate fell to 6.0%, an improvement from 6.2% in February.6 Unemployment reached its pandemic peak of 14.8% in April of 2020. After the announcement of the most recent stimulus package in March, the Fed estimated inflation will reach 2.4% this year, above its previous estimate of 1.8%.7 Earnings for companies in the S&P 500 were down 11% in 2020, however, they are projected to increase by over 25% in 2021.8 That is positive news for equities, but we do want to exercise caution as we look at estimates in 2022. Higher interest rates could cause wage growth, there is the potential for higher corporate taxes, and the economy could slow as we enter 2022. Regarding the Fed, following their recent meeting on St. Patrick’s Day in March, they plan to maintain the target federal funds rate of 0-0.25 bps through 2023 and continue bond purchases throughout the remainder of 2021.9 If the economy does perform as well as expected to close out 2021, it’s possible that the Fed may need to taper back bond purchases in 2022 to curb fears of inflation. As of now, inflation is still in a relatively comfortable range, but it is worth monitoring as more financial stimulus enters the economy.
As the first quarter came to an end in 2020, we were still in the early stages of the pandemic, local governments were just starting their lockdowns, and every news station had a permanent number on the side of their screen tracking the growth of coronavirus cases. Twelve months later we are still tracking cases and fatalities, but just as important is tracking our progress towards herd immunity. Herd immunity can potentially be achieved through a combination of tracking those that have been infected by the virus along with those that have been vaccinated. The first image below shows the large decrease in cases and deaths on a 7-day moving average in the first quarter of 2021 due in large part to the roll out of the vaccines. As you can see in the second image, the total number infected by the virus is starting to plateau and the number of those vaccinated is beginning to increase.
The percentage of the population experiencing immunity has increased to over fifty percent at the end of the first quarter, and J.P. Morgan’s analysts project that we will enter the 60-80% zone of herd immunity in April (65%) and surpass the zone by the end of the second quarter (85%).11 These numbers are supported by the image below showing the results of a recent Gallup poll. The percentage of Americans willing to get the vaccine has increased from 50% in September of 2020 up to 74% in March of 2021.12 The important note is that we are making progress towards herd immunity. These numbers lead us to believe that we will be in a much better spot regarding the pandemic as we enter the third quarter of 2021.
President Joe Biden signed the $1.9 trillion American Rescue Plan on March 11th. It provided direct $1,400 payments to Americans making under $75,000. It also provided aid to state and local governments, extended unemployment benefits, expanded tax credits, provided aid to small business, and helped with the Covid-19 response.13
The plan was an economic aid package designed to help Americans and businesses survive the pandemic downturn. However, the plan did little to advance Biden’s long term economic agenda when it comes to infrastructure and transitioning to renewable energy, so on Wednesday, March 31st, President Biden introduced the American Jobs Plan. The bulk of the plan is to be spent on infrastructure with over $600 billion dedicated to transportation infrastructure (highways, public transit) and another $600 billion going to community infrastructure (clean drinking water, housing, schools, VA hospitals). $580 billion will go towards research and development, manufacturing, and workforce development. The plan is rounded out with $400 million dedicated to improving elderly care.14 The plan will still need to go through Congress, but it is likely that at least some trimmed down version of the plan is passed. How is the plan going to be funded? The likely solution is Biden’s Made in America Tax Plan that would undo a lot of changes from former President Trump’s Tax Cuts and Jobs Act in 2017. The main change is raising the corporate tax rate from 21% to 28% which is expected to raise the $2 trillion needed for funding over the next 15 years. The American Jobs Plan is the first of two plans that Biden will introduce following the passing of the American Rescue Plan. The next plan, likely to be introduced in April, will be the American Family Plan that will aim to address healthcare and education.15 This plan will also try to extend benefits to lower and middle-income earners targeting three programs: expanding the Earned Income Tax Credit to help more Americans over the age of 65, the Dependent Care Credit for help with daycare allowing both spouses to return to work, and the Child Tax Credit.11
It has now been a full calendar year since markets experienced their massive correction due to the pandemic, and the S&P 500 ended the month of March at a new record high. It was a bumpy ride as there were concerns regarding the potential for higher inflation and rising bond yields, specifically the 10-year treasury. As alluded to earlier, corporate earnings are set to see growth of over 25% in 2021, the economy is likely to continue its expansion as U.S. real GDP is estimated at 8% growth in 2021, and more Americans are financially stable with money to spend due to a combination of financial stimulus along with pent up demand. All of those bode well for equities. However, potential inflation could prove negative for equities, and it will likely mean increased volatility throughout the remainder of the year. Even though rising yields are not a good sign for bonds, it is wise to maintain fixed income exposure due to its low correlation to equities. We recommend staying in your asset allocation driven risk-based portfolios due to the uncertainties regarding the economic recovery. We have never experienced a recovery from a pandemic in modern times, so we can’t confidently predict exactly how things will unfold. We do know that value stocks usually perform better in higher inflationary environments, but also that we do need exposure to growth as the year comes to an end and the economic recovery begins to slow. International equities still look relatively cheap from a valuation perspective and should yield higher dividends compared to their counterparts in the United States. International fixed income and emerging market debt are also providing stronger yields with higher credit quality than past years. The important take away is that there are meaningful reasons to maintain a diversified approach based on your risk tolerance, and why each asset class should have some exposure in your portfolios. It is imperative that you have the right expectations for how your portfolio should perform. If you’d like to review those expectations or revisit your risk tolerance, please don’t hesitate to reach out.
Thank you for your continued trust in VEGA.
ChangePath, Portfolio Manager
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager
Robert Kellogg, CFA
ChangePath, Investment Officer
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager
1 – https://www.investing.com/indices/major-indices
2 – https://www.bea.gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-4th-quarter-and
3 – https://www.frbatlanta.org/cqer/research/gdpnow
4 – https://www.cnbc.com/2021/04/01/ism-manufacturing-march-2021.html
5 – https://www.axios.com/goldman-sachs-us-economy-grow-8-per-cent-2021-eb7e1d84-b6fa-483a-9e19-37a7faddadc0.html
6 – https://www.cnbc.com/2021/04/02/us-jobs-report-march-2021.html
7 – https://www.cnbc.com/2021/03/17/heres-where-the-federal-reserve-sees-interest-rates-the-economy-and-inflation-going-in-the-future.html
8 – https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_032621A.pdf
9 – https://www.federalreserve.gov/monetarypolicy/files/monetary20210317a1.pdf
10 – Centers for Disease Control and Prevention, Johns Hopkins CSSE, Our World in Data, J.P. Morgan Asset Management.
*Share of the total population that has received at least one vaccine dose. **Est. Infected represents the number of people who may have been infected by COVID-19 by using the CDC’s estimate that 1 in 4.6 COVID-19 infections were reported. ***Est. Infected & vaccinated only assumes those infected equally likely to be vaccinated as those not infected.
Guide to the Markets – U.S. Data are as of March 31, 2021.
11 – https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/
12 – https://news.gallup.com/poll/342431/satisfaction-vaccine-rollout-surges.aspx
13 – https://www.statista.com/chart/24395/composition-of-the-american-rescue-plan-act/
14 – https://www.investopedia.com/what-s-in-joe-biden-s-usd2-trillion-american-jobs-plan-5120273
15 – https://www.forbes.com/advisor/personal-finance/biden-american-jobs-plan/