VEGA: 1st Quarter 2022 Portfolio Review
The 1st Quarter 2022, to be honest, has been rough in most areas of the market. The S&P 500 was down -4.6%, international equities, as measured by the MSCI All Country World Index, was down -5.36%, and fixed income, as measured by the U.S. Aggregate Bond Index, was down -5.93%.
|Ticker||Security Description||Portfolio Weight %|
|TIP||iShares TIPS Bond ETF||2.02%|
|EEM||ISHARES MSCI EMERGING MARKET||3.93%|
|EFA||ISHARES MSCI EAFE ETF||12.90%|
|IWP||ISHARES RUSSELL MID-CAP GROW||7.08%|
|IWM||ISHARES RUSSELL 2000 ETF||3.11%|
|IYE||ISHARES U.S. ENERGY ETF||3.35%|
|GOVT||ISHARES US TREASURY BOND ETF||6.77%|
|IUSB||ISHARES CORE TOTAL BOND ETF||11.67%|
|SPY||SPDR S&P 500 ETF TRUST||41.49%|
|XLK||TECHNOLOGY SELECT SECT SPDR||2.01%|
As of 03.31.2022. Cash not included.
We were very active during the 1st quarter due to the changing political and economic climate and increase in market volatility.
Covered Calls: January, February and March Covered Calls all expired worthless allowing us to add the premium generated to the portfolio which helps mitigate risk. In addition, we received more premium than in previous months, from the sale of the Calls, due to the increase in volatility. We also moved the coverage dial to a higher percentage of the underlying portfolio. New calls were written for April expiration.
Protective Puts: In January we sold ½ of our Puts and the other half in March to recognize its value as they moved towards expiration.
Tactical Shifts: During February and March we initiated two tactical shifts. In February, we reduced our exposure to TIP, IXG (iShares Global Financial ETF), EFA, IWM, IYE and XLK and increased our exposure to IWP, GOVT, IUSB and SPY. In March we reduced our exposure to EFA again, eliminated our exposure to IXG altogether and increased again our exposure to GOVT and SPY.
Volatility-Based Reinvestment (VBR): In February, based upon the spike in volatility, we initiated a VBR and invested 33% of our available cash into SPY. This is a qualitative approach to investing after a decline in market prices.
Q1 2022 Review
Markets struggled as the war in Ukraine continued. Many Western governments sanctioned and shunned Russian oil, causing prices to rise, which fed into inflation, which investors feared would feed into interest rates.
Commodities: Oil prices skyrocketed, clearing a high of $130.[i] Many other commodities experienced volatility during the quarter.
Inflation: Inflation reached a four-decade high of 7.9%.[ii] Energy, groceries, restaurant, transportation, and apparel categories all showed the biggest gains in inflation.
The Fed and Rates: On March 16, the Fed raised rates for the first time since 2018 with a 25 bps increase.
While markets celebrated the fact that the Fed wasn’t more aggressive than expected, Fed Chairman Jerome Powell suggested rates could go significantly higher, and bond yields posted their biggest quarterly gain in decades (prices move inversely to yields). See chart below showing the dramatic moves on the 10-Year Treasury yield.
10 Year Treasury Yield [iii]:
Q1 Market Returns [iv]:
|Index return||March (%)||Q1 (%)||1 Year (%)||3 Year (%)||5 Year (%)||10 Year (%)|
|S&P 500 TR||3.7||-4.6||15.6||18.9||16.0||14.6|
|DJ Industrial Average TR||2.5||-4.1||7.1||12.6||13.4||12.8|
|NASDAQ Composite TR||3.5||-8.9||8.1||23.6||20.3||17.8|
|Russell 2000 TR||1.2||-7.5||-5.8||11.7||9.7||11|
|MSCI EM GR||-2.2||-6.9||-11.1||5.3||6.4||3.7|
|MSCI EAFE GR||0.8||-5.8||1.6||8.3||7.2||6.8|
|Bloomberg US Agg Bond TR||-2.8||-5.9||-4.2||1.7||2.1||2.2|
As of 3.31.2022. Returns shown are total returns of indices. Returns over one year are annualized.
If you’re feeling like you have no idea what to expect for the rest of the year, you’re not alone. It’s been a month of more questions than answers: Are we in a bear or bull market, experiencing inflation or stagflation, heading towards expansion or a recession? In uncertain markets, it’s most important to go back to the fundamental pillars of investing:
- Stay the course. Although markets are choppy, keep your eye on the horizon, and remember that time typically works in your favor.
- Know your portfolio. While core bonds can offer a ballast in risk-off markets, make sure you know how much duration is in your portfolio – because rates can rise fast.
- Consider expanding your diversifiers beyond bonds into alternative investments.
Thank you for your continued trust in VEGA.
[i] Wall Street Journal, March 31, 2022. https://www.wsj.com/articles/stocks-on-pace-for-worst-quarter-in-two-years-despite-strong-finish-11648747913?mod=markets_lead_pos1
[ii] Bloomberg, March 10, 2022: https://www.bloomberg.com/news/articles/2022-03-10/u-s-inflation-hits-fresh-40-year-high-of-7-9-before-oil-spike
[iii] 10 Year Treasury rate: Y Charts from Investopedia as of April 1, 2022 6:52am ET.
[iv] Data from Morningstar unless otherwise specified. Returns over one year are annualized.
Past Manager Commentary