VEGA: 3rd Quarter 2021 Portfolio Review
|3rd Qtr. 2021||YTD|
|MSCI All County World Index||-1.05%||11.12%|
|Cboe S&P 500 Buy Write Index (BXM)||1.35%||12.61%|
|Bloomberg Barclays U.S. Aggregate Bond Index (AGG)||0.05%||-1.55%|
As of 09.30.2021.
Third Quarter 2021 started off strong during July and August, peaking in early September. However, September has historically been the worst performing month for the S&P 500 and 2021 was no exception. During September, the S&P 500 lost 4.65%, bringing its QTD return to just a measly 0.58%. International Equities did not far any better than U.S. Equities. For September, MSCI All Country World Index lost 4.13%, bringing the QTD performance into negative territory with a loss of 1.05%. Fixed Income held steady with a very slight gain of 0.05% in 3rd Quarter 2021.
The best performing Asset Classes for the VEGA ETF in Third Quarter 2021 were U.S. Energy (IYE) and Global Financials (IXG – iShares Global Financials ETF), with performance of 6.8% and 4.1% respectively.
Emerging Markets (EEM – iShares MSCI Emerging Markets ETF) was the largest drag on performance and had a return of -5.1% for the Third Quarter 2021. Non-U.S. Developed (EFA – iShares MSCI EAFE ETF) also performed negatively and posted a return of -2.3%.
|Ticker||Security Description||Portfolio Weight %|
|SPY||SPDR S&P 500 ETF TRUST||35.65%|
|EFA||ISHARES MSCI EAFE ETF||20.71%|
|IUSB||ISHARES CORE TOTAL BOND ETF||7.13%|
|IWP||ISHARES RUSSELL MID-CAP GROW||6.01%|
|TIP||iShares TIPS Bond ETF||4.05%|
|IWM||ISHARES RUSSELL 2000 ETF||4.00%|
|EEM||ISHARES MSCI EMERGING MARKET||3.92%|
|IYE||ISHARES U.S. ENERGY ETF||3.23%|
|GOVT||ISHARES US TREASURY BOND ETF||3.05%|
|XLK||TECHNOLOGY SELECT SECT SPDR||2.99%|
As of 09.30.2021. Cash not included.
Protective Puts: VEGA continues to hold the Protective Puts established in the First Quarter 2021. At the time the Protective Puts were established they represented 20% of the portfolio’s notional value. The established Protective Puts expired in August 2021. New Protective Puts were established for the same 20% Notional Coverage and have an expiration of December 2021.
Tactical Shifts: VEGA experienced a large Tactical Shift in the middle of the Third Quarter. During this tactical shift, both Global Technology (IXN) and Short Term High Yield (LQD) were eliminated from the portfolio in favor of U.S. Energy (IYE) and U.S. Inflation Protected Treasuries (TIP). This trade takes the gain from the run-up in Technologies off the table by replacing it with Energies. It also reduces inflation risk amongst the Fixed Income holdings, given the recent reintroduction to inflation in recent month.
Volatility-Based Reinvestment: There had not been a Volatility-Based Reinvestment since September 2020. Going into September, the 200-day moving average on the CBOE Volatility Index (VIX) was approximately 20%. Stocks mostly immediately took a tumble as soon as the calendar page turned. VIX did finally break the threshold for 25% above the 200-day moving average the day Monday following September’s expiration. Given that VEGA was holding 7% in cash, 1% of that cash was used to rebuild the portfolio and purchase back into SPY. This would leave VEGA with about 6% remaining cash for any subsequent breeches in thresholds at 50%, 75% and 100% above the VIX’s 200-day moving average.
Beta: As VEGA closed out the First Quarter 2021, the beta of the portfolio was approximately 0.65 compared to the S&P 500. This is a larger than typical deviation away from a long-term target beta of 0.60 but reduced from the Second Quarter Beta of 0.67. This is reflects the risk-reduction in Fixed Income.
|Index Returns (as of 9/30/2021)||Level||September||Q3||YTD|
|Dow Jones Industrial Average||33,843.33||-4.29%||-1.91%||10.58%|
|MSCI Emerging Markets||1,253.10||-4.25%||-8.84%||-2.96%|
|U.S. Aggregate Bond||–||-0.87%||0.05%||-1.55%|
The Dow Jones Industrial Average (DJIA) was down 4.29% for the month and is now up 10.58% on the year, while the NASDAQ Composite was down over 5% for the month and is now up just over 12% on the year. Small cap stocks continued to fall after they had a strong start to the year. The small cap index was down over 3% for the month, but it is still up 11.62% on the year after its strong start. International stocks were not immune to the pullback as the MSCI EAFE fell 3.19% during the month and is now up just over 6% for the year. Emerging markets are now in negative territory for the year after falling over 4% in September. The Bloomberg U.S. Aggregate Bond Index had another negative month and is now down 1.55% on the year. 1
On Wednesday, September 22nd, the U.S. Food and Drug Administration authorized a booster shot from Pfizer and BioNTech for the Covid-19 vaccine for those ages 65 and older along with others at high risk.2 President Joe Biden received his on live television on Monday, September 27th, hoping to assure Americans that the vaccine is safe and urging them to get it when it is available to them.3 Moderna and Johnson & Johnson booster shots are still being considered by the FDA, while Merck has developed a Covid-19 pill to treat those infected with the virus.4 While not yet approved, the pill is designed to stop the virus from replicating within the body and hopefully lower the chances of those needing hospitalization. Currently, 65% of Americans have received at least one dose of the vaccine while 56% are fully vaccinated.5 These are positive signs in the fight against the virus, but the virus is still a very real threat as Covid-19 cases continue to spread, albeit at a slower pace. The virus will continue to create headlines; however, many experts believe that the markets have priced in the virus and see it as transient relative to other matters at hand that can affect them.
Real GDP in the United States increased at an annual rate of 6.7% in the second quarter of 2021 after the third estimate was released in late September. This is a slight upward revision from the previous 6.6% estimate. Output is continuing to accelerate as this is an increase from the 6.3% number in the first quarter of this year. A large attributing factor to the increase in real GDP was the increase in consumer spending which accounts for roughly 70% of economic activity. Consumer spending grew at an annual rate of 12%, the fastest expansion since the economy began to reopen in the third quarter of 2020.6
Capitol Hill and The Fed
On Thursday, September 30th, President Biden signed legislation to avert a partial government shutdown with only a few hours to spare as the budget year ended at midnight that evening.8 The legislation extends the current budget plan into December of this year. Had the shutdown occurred, many federal employees would have stopped getting paid and many others would have stopped working. Numerous national attractions and parks would have also been closed, but the essential aspects of government would continue as the Biden Administration believed a shutdown would have very little effect on aspects of public health. The last time a shutdown occurred was in late 2018 through early 2019.
Avoiding the shutdown was step one. The second step is to raise the national debt ceiling. This is an artificially imposed borrowing limit. If the ceiling is not raised, the U.S. could default on its national debt. Many experts predict that the country would plunge into an immediate recession as millions of jobs would be lost and interest rates would increase rapidly. For investors, the stock market would also drop quickly. Mark Zandi, chief economist at Moody’s Analytics, told CNN: “It would be financial Armageddon. It’s complete craziness to even contemplate the idea of not paying our debt on time.” Democrats voted with Republicans three times during Trump’s presidency, and most rational people believe that the ceiling will get raised one way or another. The deadline for it to be raised is October 18th. 9
The third and final step is to pass the $1 trillion infrastructure bill along with the $3.5 trillion social and environmental bill. The infrastructure bill will go towards investing in roads, railways, bridges, ports, airports, broadband internet and more. The bill has passed through the Senate already and it was scheduled to be voted on in late September by the House, but that has been delayed into October. With some Republicans in the House backing away from the bill and progressive Democrats unsure how they will vote, it is possible the bill was not going to make it through the House at this time, hence the delay. The progressive Democrats wanted to see both the $1 trillion and the $3.5 trillion bill on the floor at the same time. They are afraid that once they pass the $1 trillion infrastructure bill, many centrist Democrats will then go cold on the larger $3.5 trillion bill. As you can see, there is quite the dilemma in Congress and House Speaker Nancy Pelosi will try to navigate representatives in order to get versions of both bills passed by the end of October. The $3.5 trillion social and environmental bill would extend the child tax credit, federally fund family and medical leave systems, along with moving the country towards renewable energy to fight climate change.9 There is a lot to monitor in Washington as we head towards 2022 with the results surely to affect us all one way or another.
Lastly, the Federal Reserve Board held its most recent FOMC meeting on September 21st and 22nd. The Fed announced that it “may soon be warranted” to begin tapering bond purchases. This was somewhat expected given previous comments; however, we are still waiting on specifics. It’s possible that they announce the taper in November, but the fact that specifics weren’t given in September shows that the Fed is still somewhat dovish and focused on economic growth rather than controlling inflation. As previously discussed, the second Fed lever is rate hikes. Fed Chair Jerome Powell stated that the tapering of bond purchases will not be a direct signal to rate hikes, but there were interesting developments based on Fed member expectations after September’s meeting. In the June meeting, only seven of the eighteen Fed members expected a rate hike in 2022, but that number increased to nine after September’s meeting.10 We will continue to monitor what is happening in Washington throughout October followed by the Fed’s meeting in November.
The markets took their largest hit of the year in September. It was a steady drop though, as the largest one-day decline for the S&P 500 during the month was only 2.04% on September 28th. September has traditionally been the worst month for the index averaging a 0.99% decline, and given the last 18 months, a slight pullback was to be expected at some point. It’s very possible that there is more to come as the country is still dealing with the virus and the many issues in Washington.11 However, we want to reiterate much of what we said last year during the start of the pandemic, and that is not to panic. The following images are a few pieces of evidence as to why it is important to remain calm during these pull backs and bouts of volatility. The first image shows intra-year market declines with the red dots and the year ending market performance displayed by the gray bars. As you can see, on average, the market experienced a 14.3% price drop per year, and still finished the year positive in 31 out of the last 41 years. In order to get to that average drop of 14.3%, the S&P 500 normally experiences a 10% drawdown once per year and a 5% drawdown once per quarter. Statistics like these can help to set expectations for investors so that they aren’t terribly surprised to see another pull back or more volatility in the 4th quarter of this year.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2020, over which time period the average annual return was 9.0%. Guide to the Markets – U.S. Data are as of September 30, 2021
The next image is evidence as to why we always recommend staying disciplined to your long-term investment objective based on your risk tolerance. From 1995 through August of 2021, you can see the annualized return of the S&P 500 on the far left equal to 9.0%. Had you stayed invested during the entire period, your $500,000 investment grew to over $4.2 million, but if you missed only the 5 best days during that time period, your investment grew to just $2.7 million. That is a $1.5 million dollar difference accomplished by simply trying to time the market. It is also worth noting that a study done by J.P. Morgan showed that six of the ten best days in the market from 1998 through 2017 occurred within two weeks of the 10 worst days. If investors worry and try to pull out at the sign of trouble, there is a decent chance that they may miss those good days to follow resulting in significantly lower returns.
Source: Maryland Capital Management: Strategas Research Partners, S&P 500® Index. For illustrative purposes only. The S&P 500® Index is unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
The last image we will touch on shows the performance of the average investor during a the 20-year time frame from 2001 through 2020. Many investors think that they can actually time the market and claim to have done so simply because they got out before the bottom. However, most of them will not reinvest in time. Timing the market is very difficult and more often than not, the average investor will fail. During this period, the S&P 500 returned 7.5% per year. The two blue columns represent the disciplined investor with a balanced portfolio of 60% equities and 40% fixed income or vice versa. The disciplined, balanced investor achieved an annualized return of right around 6%, while the average investor that tried to time the market achieved an annualized return of less than 3% represented by the orange column.
Source: Dalbar Inc. Indices used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz., Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/18 to match Dalbar’s most recent analysis. Guide to the Markets – U.S. Data are as of December 31, 2019.
The market is volatile, but history has shown you are better off if you stay disciplined in your investment approach. The market could continue to fall through the end of the year, or it might not. At the end of the day, investing is about time in the market, not timing the market. We continue to recommend a globally diversified approach based on your risk tolerance. If you’d like to revisit your risk tolerance or talk about how the recent pull back in the market has made you feel, please don’t hesitate to reach out and schedule a conversation.
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.theguardian.com/world/2021/sep/22/fda-approves-covid-booster-pfizer
3 – https://www.npr.org/2021/09/27/1040898432/biden-covid-booster-vaccine
4 – https://apnews.com/article/merck-says-experimental-covid-pill-cuts-worst-effects-a9a2245fdcee324f6bbd776a0fffcc60
5 – https://covid.cdc.gov/covid-data-tracker/#vaccinations_vacc-total-admin-rate-total
6 – https://apnews.com/article/coronavirus-pandemic-business-health-economy-gross-domestic-product-0b61a82a13f105ba668a4537fb198514
7 – https://www.bea.gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-2nd
8 – https://www.cnbc.com/2021/09/30/government-shutdown-congress-moves-to-pass-funding-bill.html
9 – https://www.theguardian.com/us-news/2021/sep/30/explainer-us-government-shutdown-budget-debt-ceiling-biden-democrats
10 – https://www.cnbc.com/2021/09/22/watch-jerome-powell-speak-after-fed-wraps-up-september-meeting-live-blog.html
11 – https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/