VEGA: 1st Quarter 2022 Portfolio 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.

Portfolio Update

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%.

 

Top Holdings

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.

Activity

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.

Market Outlook

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.

What’s Next?

 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.

Respectfully,

 

Ken Hyman
ChangePath
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager


[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

Information is from sources deemed to be reliable, but accuracy is not guaranteed.


Definitions:

Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.

The Barclays Capital U.S. Intermediate Government Bond Index measures the performance of U.S. Dollar denominated investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Consumer Sentiment Index is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy.

covered call option involves holding a long position in a particular asset, in this case shares of an ETP, and writing a call option on that same asset with the goal of realizing additional income from the option premium.

Delta represents the rate of change between an option’s price and a $1 change in the underlying asset’s price. In other words, the price sensitivity of an option relative to the underlying.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

The MSCI All Country World Index (ACWI) is is an unmanaged free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

An option is a privilege, sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date.

Exercising an option means to put into effect the right specified in the option contract.

An option premium is income received by an investor who sells or “writes” an option contract to another party.

A call option is considered Out Of The Money when the call option’s strike price is higher than the prevailing market price of the underlying stock. A put option is considered Out Of The Money when the put option’s strike price is lower than the prevailing market price of the underlying stock.

protective put is an option strategy which entails buying shares of a security and, at the same time, enough put options to cover those shares. This can act as a hedge on the invested security, since matching puts with shares of the stock can limit the downside (due to the nature of puts).

The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A reading above 50 indicates expansion in the sector; below 50 indicates contraction.

put option is a contract that gives the owner of the option the right to sell a specified amount of the asset underlying the option at a specified price within a specified time.

A short position is the sale of a borrowed investment with the expectation that it will decline in value.

Theta is a measure of the rate of decline in the value of an option due to the passage of time.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Implied Volatility is the estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

The Volatility Index (VIX) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.


Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Other Fund risks included: allocation risk; derivative risk; early closing risk; Exchange Traded Note risk; liquidity risk, market risk; trading risk; commodity risk; concentration risk; counterparty risk; credit risk; emerging markets and foreign securities risk; foreign currency risk; large-, mid- and small- cap stock risk. Please see the prospectus for detailed information regarding risk. The Fund is also subject to options risk. Writing and purchasing call and put options are specialized activities and entail greater than ordinary investment risk. The value of the Fund’s positions in options fluctuates in response to the changes in value of the underlying security. The Fund also risks losing all or part of the cash paid for purchasing call and put options. The Fund may not be suitable for all investors.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. 

Holdings and allocations are subject to risks and change.

The views in this commentary are those of the portfolio manager and many not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.