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VEGA: December 2018 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/fund/vega.

Category Review

  December YTD
VEGA NAV* -6.21% -6.367%
MSCI World Index -7.60% -8.71%
BXM Index -7.73% -4.77%
Int. Gov’t/Credit Bond 1.34% 0.88%
Policy Benchmark -5.44%

-4.51%

Policy Benchmark comprises the following allocation:VEGA Policy Benchmark is a blended benchmark of 37.5% MSCI World Index, 37.5% CBOE S&P 500 Buy/Write Index (BXM) and 25% to the Barclays Intermediate Government Corporate Index.

Portfolio Review

December 2018 was another volatile month which really escalated dramatically on December 24th. VEGA posted a negative return of -6.21% during December. The indexes that make up the VEGA ETF Policy Benchmark were mixed during December. CBOE S&P 500 BuyWrite Index down 7.73% during December. Bloomberg Barclays Intermediate U.S. Gov/Credit Bond was only slightly positive post a return of 1.34%. MSCI World Index posted a negative return of 7.60%.

For the month, VEGA’s Policy Benchmark was down -5.44%.

The best place to be invested during the month of December would have been in Fixed Income investments:

Winners    
Vanguard Intermediate-Term Bond ETF BIV 2.00%
iShares Core U.S. Aggregate Bond ETF AGG 1.98%
SPDR DoubleLine Total Return Tactical ETF TOTL 1.11%
iShares Short-Term Corporate Bond ETF IGSB 0.78%

 The biggest laggards in December would have been equity based:

Laggards    
iShares Russell 2000 ETF IWM -11.97%
SPDR S&P 500 ETF Trust SPY -8.79%
Vanguard Real Estate VNQ -7.96%
Xtrackers MSCI Europe Hedged Equity ETF DBEU -5.81%
iShares MSCI EAFE ETF EFA -5.35%

 

Top 10 Holdings

Stock Ticker

Security Description

Portfolio Weight %

SPY

SPDR S&P 500 ETF TRUST

58.47%

EFA

ISHARES MSCI EAFE ETF

8.36%

IGSB

ISHARES SHORT TERM CORPORATE

6.10%

IWM

ISHARES RUSSELL 2000 ETF

5.69%

DBEU

XTRACKERS MSCI EUROPE HEDGED EQUITY ETF

4.56%

LMBS

FIRST TRUST LOW DURATION OPP

4.07%

BKLN

INVESCO SENIOR LOAN ETF

3.98%

HYGH

ISHARES INT RATE HEDG HY ETF

3.94%

Cash

BLACKROCK LIQUIDITY T 60

3.21%

As of 12.31.2018.

Activity

VEGA ETF continued writing Out-Of-Money Calls on SPY and EFA, which continues to provide a buffer to the decline of the underlying securities and the ability to earn higher premiums due to increased volatility. Additionally, during December we shifted our Fixed Income component to be more conservative with lower duration given that we are in a raising rate environment. Additionally, several of our Fixed Income holdings like Convertibles and Real Estate had higher than desired correlations to equity markets. This proved helped having removed VNQ and CWB ahead of the end of December sell-off. We also saw an opportunity to take advantage of a market that was clearly oversold and we deployed some of our remaining cash back in to SPY in order to take advantage of the clear over-correction in the market.

Outlook

Please note, we are in the process of creating our comprehensive Market Outlook for 2019. This is an intensive process which we view as a labor of love. During this process we analyze, criticize and review many parts of the Business Cycle, Economic Cycle and Market Volatility. This is an opportunity for us to look forward beyond what happened in the short-term and gain fresh perspective on the year to come.

Q4 2018 Highlights and Attribution:

  • Global equity indices were negative in Q4 2018 on a total return basis: the S&P 500 lost 13.5%, the MSCI EAFE index was down 12.5%, and the MSCI Emerging Market index lost 7.4%. The Russell 2000 was the worst performer of the group, returning -20.2% in Q4.
  • Amidst the volatility, investors took refuge in bonds—the Bloomberg Barclays Global Aggregate Total Return index returned 1.2% for the quarter, while the Bloomberg Barclays US Treasury Total Return returned 2.6%.
  • The 10 Year Treasury fluctuated majorly during the quarter and began the period at 3.09% while finishing at 2.69% and having peaked at 3.24% on November 8th.
  • The third and final reading of Q3 2018 US GDP growth came in at 3.4%, slightly below the second estimate of 3.5% growth. The Bureau of Economic Analysis noted in its release, “Personal consumption expenditures (PCE) and exports were revised down, and private inventory investment was revised up; the general picture of economic growth remains the same.”
  • The December report on homebuilder sentiment failed to inspire, having undershot forecasts by four points with a reading of 56.
  • In its December 2018 policy meeting, the Federal Reserve raised the Federal Funds Rate by 25bps to a range of 2.25-2.50%, the fourth and final hike of 2018. Markets sold off during Fed Chair Powell’s subsequent press conference, as market participants perceived his comments to be less dovish than expected.
  • Pimco, last month, warned investors should “keep their powder dry and look for specific opportunities,” in an outlook posted on its website. The bond giant forecast continued stock-market volatility and emphasized cautious positioning overall and a focus on high quality defensive growth.
  • The Bank of England left its key interest rate on hold at 0.75% in a unanimous vote by the Monetary Policy Committee. In a statement, the central bank said “the near-term outlook for global growth has softened and downside risks to growth have increased.”
  • Italy reached a new budget deal with the European Commission, avoiding an EU disciplinary procedure and resolving a dispute that had vexed financial markets for months.
  • Eurostat, the statistical office of the European Union, said that seasonally adjusted GDP rose by 1.6% in the euro area and by 1.8% in the EU28 in the third quarter of 2018. This is down from 2.2% and 2.1%, respectively, in the second quarter.
  • IHS Markit commented on the December 2018 Eurozone Manufacturing PMI print of 51.4, “The slowdown of growth in the euro area’s manufacturing economy, seen throughout much of 2018, carried on until the end of the year in December… Although extending the current run of expansion to five-and-a half years, the latest PMI reading was the lowest seen since February 2016.
  • The World Bank forecast Chinese 2019 growth of 6.2% from an expected 6.5% in 2018, with the slowdown due to its trade dispute. “To stimulate the economy, fiscal policy could focus on boosting household consumption rather than public infrastructure”, adding that China has room to further lower business taxes.
  • China slowed signs of slowing down, as the Caixin China General Manufacturing PMI fell to 49.7, “signal[ing] a renewed deterioration in overall operating conditions”, according to IHS Markit.

 

Very Truly Yours,

David Young
Partnervest Advisory Services, CIO
AdvisorShares STAR Global Buy-Write ETF (VEGA), Portfolio Manager

 

Past Manager Commentary

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

*Performance and pricing data used for VEGA ETF is based on the indicated value of the ETF at the close of the day.


Definitions:

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 Cboe S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index.

he MSCI World Index is a market cap weighted index which captures large and mid cap representation across 23 Developed Markets countries.

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. An option premium is income received by an investor who sells or “writes” an option contract to another party. 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. 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. A protective put is an option strategy which entails buys 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). Exercising an option means to put into effect the right specified in a contract.

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.


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 to change. The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter.

The views in this material were those of the Portfolio Manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.