VEGA: 1st Quarter 2023 Portfolio Review
Portfolio Update
| as of 03.31.2023 | 1Q23 | YTD |
| VEGA (NAV) | 5.70% | 5.70% |
| MSCI AC World Index | 7.31% | 7.31% |
| CBOE S&P 500 BuyWrite Index | 7.52% | 7.52% |
| Barclays U.S. Aggregate Bond Index | 2.96% | 2.96% |
In March, equities were mostly up despite a tumultuous month of news surrounding regional banks in the U.S.1 At its most recent meeting, the Federal Reserve (Fed) raised interest rates 25 basis points (bps) but signaled that rate increases are potentially nearing an end. Bonds and growth stocks, two of the most out of favor asset classes since the start of the Fed hiking cycle, had strong performance as investors hedged the possibility of a Fed pivot.
Top Holdings
| Ticker | Security Description | Portfolio Weight % |
| SPY | SPDR S&P 500 ETF TRUST | 39.89% |
| EFA | ISHARES MSCI EAFE ETF | 14.79% |
| IUSB | ISHARES CORE TOTAL BOND ETF | 13.88% |
| IWP | ISHARES RUSSELL MID-CAP GROW | 8.08% |
| EEM | ISHARES MSCI EMERGING MARKET | 6.10% |
| MBB | ISHARES MBS ETF | 5.90% |
| GOVT | ISHARES US TREASURY BOND ETF | 4.09% |
| TLH | ISHARES 10-20 YEAR TREASURY | 1.49% |
| MTUM | ISHARES MSCI USA MOMENTUM FA | 1.26% |
| SJNK | SPDR BLOOMBERG SHORT TERM HI | 0.93% |
As of 03.31.2023. Cash not included.
Activity
Covered Calls: All the monthly calls sold in the first quarter expired worthless and added an annualized return of .92% to the portfolio based upon an annualized value of the portfolio at the time the options were sold. The out of the moneyness at the time the calls were sold was an attractive 5.50% in January, 5.10% in February and 6.10% in March.
Tactical Shifts: Following the collapse of Regional Banks, we increased our allocation into GOVT, MBB, EEM, and EFA and reduced our allocation to SJNK, TLH, IWM, MTUM.
| GOVT | ISHARES US TREASURY BOND ETF |
| MBB | ISHARES MBS ETF |
| EEM | ISHARES MSCI EMERGING MARKET |
| EFA | ISHARES MSCI EAFE ETF |
| SJNK | SPDR BLOOMBERG SHORT TERM HI |
| TLH | ISHARES 10-20 YEAR TREASURY |
| IWM | ISHARES RUSSELL 2000 ETF |
| MTUM | ISHARES MSCI USA MOMENTUM FA |
Market Outlook
MARKETS
| Index Total Returns (%)1 | 1Q 2023 | YTD | 1 Year | 3 Year | 5 Year | 10 Year |
| S&P 500 Index TR | 3.67 | 7.50 | -7.73 | 18.62 | 11.19 | 12.24 |
| DJ Industrial Average TR | 2.08 | 0.93 | -1.98 | 17.33 | 9.01 | 11.15 |
| NASDAQ Composite TR | 6.78 | 17.05 | -13.28 | 17.58 | 12.60 | 15.30 |
| Russell 2000 Index TR | -4.78 | 2.74 | -11.61 | 17.52 | 4.71 | 8.04 |
| MSCI Emerging Markets Index GR | 3.07 | 4.02 | -10.30 | 8.23 | -0.53 | 2.37 |
| MSCI EAFE Index GR | 2.61 | 8.62 | -0.86 | 13.53 | 4.03 | 5.50 |
| Bloomberg US Aggregate Bond Index TR | 2.54 | 2.96 | -4.78 | -2.77 | 0.91 | 1.36 |
As of 3/31/2023. Returns shown are total returns of indices. Returns over one year are annualized. It is not possible to invest direction in an index.
Volatility persisted in the month of March, with the CBOE Volatility Index (VIX) at one point spiking above 30 intraday2, a sign that investors are growing more concerned about global financial conditions.
The big stories of the quarter were centered on regional banks, starting with the failures of Silicon Valley Bank (SVB) and Signature Bank (SBNY), which occurred in part due to the fastest Fed hiking cycle in history. Credit Suisse Group, AG, came to the brink of failure before a takeover by UBS Group, AG. Big banks in the U.S. also stepped in when First Republic Bank got swept up in the contagion.
Stocks showed resiliency; the S&P 500 Index ended the month up modestly rising 3.67%. Both the Dow Jones Industrial Average Index and the Russell 2000 Index had weaker performance, ending the month up 2.08% and down 4.78% respectively. The Nasdaq Composite Index was the big winner of the major indices, returning 6.78%, as investors consider that the end of the Fed hiking cycle may be near.1
Index returns as of March 28, 2023:3
Meanwhile, fixed income markets were broadly up over the quarter, while a volatile U.S. 10-Year Treasury fell from 3.82% to 3.29%.
THE FED AND RATES
In large part due to the banking crisis, the Fed began to change its tone on rates. While the Fed raised interest rates twice in the first quarter, 25 bps in February and 25 bps in March, officials offered some signs that the Fed may be prepared to put a pause on further rate hikes4. Yields fell and bonds prices rose in response, with the yield on the U.S. 10-Year Treasury hovering around 3.29% as of publication5. The Fed remains focused on its goal of two percent inflation, and the consumer price index (CPI) continues to gradually fall6.
WHAT’S NEXT?
- Volatility is likely to persist. Investing is long term. Remember to keep your eyes on the horizon and focus on your long-term investment goals.
- Look for signs of recession. Now may be a good time to check in on portfolios and ensure they are not under-weight on fixed income exposure, which may offer income generation and portfolio protection in the event of another market downturn.
- Check your cash management. Due to higher interest rates, you can earn a yield on your cash too, whether in a savings account or through a CD. Make sure you know what you’re earning.
Thank you for your continued trust in VEGA.
Respectfully,
Ken Hyman
CreativeOne Wealth
AdvisorShares STAR Global Buy-Wrtie ETF (VEGA) Co-Portfolio Manager
Sources:
- Data from Returns over one year are annualized.
- https://www.wsj.com/market-data/quotes/index/VIX/historical-prices
- JPMorgan Wealth Source: Bloomberg Finance L.P., J.P. Morgan Wealth Management. Data as of March 28, 2023. Note: Tech proxied by the S&P 500 Technology Sector, Regional Banks by the KBW Regional Bank Index, and All Banks by the KBW Index.
- https://www.forbes.com/sites/dereksaul/2023/03/22/fed-hikes-rates-another-25-basis-points-but-indicates-that-could-be-the-end-of-rate-hikes/?sh=4d7407913b20
- https://www.cnbc.com/quotes/US10Y
- https://www.cnn.com/2023/03/14/economy/cpi-inflation-february/index.html
Information is from sources deemed to be reliable, but accuracy is not guaranteed.
Definitions:
bp or Basis point is one hundredth of a percentage point (0.01%).
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 Bloomberg US Aggregate Bond Index broadly tracks the performance of the U.S. investment-grade bond market. and is comprised of investment-grade government and corporate bonds.
The BXM Index or CBOE S&P 500 BuyWrite Index is designed to measure the total rate of return of a hypothetical “buy-write”, or “covered call”, strategy on the S&P 500 Index.
A 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.
The Dow Jones Industrial Average is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange and Nasdaq.
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.
The MSCI EAFE Index is a broad market index of over 900 stocks located within 21 countries in Europe, Australasia, and the Middle East and is often used as a benchmark for global developed market equities.
The MSCI Emerging Markets Index is used to measure the financial performance of mid- and large-cap companies in fast-growing economies in 25 countries throughout the world.
The Nasdaq Composite Index is a market capitalization-weighted index of more than 3,700 stocks listed on the Nasdaq stock exchange which is heavily weighted to the technology sector.
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.
A 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).
A 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.
The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index and is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks.
A short position is the sale of a borrowed investment with the expectation that it will decline in value.
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.