The Leatherback Long/Short Alternative Yield ETF (LBAY) (the “Fund”) net asset value (NAV) increased by 7.54% in the 3rd quarter, compared to an advance of 5.89% for the S&P 500 Index. LBAY paid our forty-sixth consecutive monthly distribution, at $0.076 per share in September. This is a 2.53% SEC yield versus the S&P 500 Index dividend yield of approximately 1.28%, and the 10-Year US Treasury yield of 3.782%. Year to date as of September 30, 2024, NAV for the Fund advanced 9.29%, compared to an advance of 22.08% for the S&P 500 Index. NAV performance for the Fund to date since inception (November 16, 2020) has produced a 56.39% cumulative total return and a 12.24% annualized total return.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling (833) 417-0090. The gross expense ratio for the fund is 1.24%.
View LBAY standardized performance here.
The Fund’s NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The market price is the most recent price at which the Fund was traded.
GOLDILOCKS
The third quarter of 2024 ended with positive returns across most asset classes, despite volatility in late July and early August. Notably, the S&P 500 Index1 returns broadened with the index advancing 5.9%. The long-awaited start of the Federal Reserve interest rate cutting cycle began in September, which drove equity markets higher. The S&P 500 return of approximately 22% during the first nine months of 2024 is the best start to a year since 19973. As we enter the fourth quarter of 2024, we cannot help but be impressed by the market strength. Given an easy Fed on a rate cutting path, coupled with benign inflation and a robust job market, we appear to be in a goldilocks environment. The S&P 500 continues to make new record highs on a routine basis and the sentiment among market participants remains very bullish. As we look out into the calendar in the fourth quarter, we are certain it will be eventful. A new Presidential administration will be determined in November and more interest rate cuts could be on the horizon. Is the market just right, or are we in the eye just before the storm?
LETFs GO! US HOUSEHOLDS ARE ALL IN
According to recent reports, US Households exposure to equities is the highest since 20004. Goldman Sachs and The Kobeissi Letter report that US Households hold 48% of their assets in equities5. Below we show a chart that shows federal reserve data showing Households and Nonprofit Organizations equity holdings as a percentage of financial assets approaching 42% illustrating this record exposure6.
With record allocations to equities and financial assets at all-time highs, speculators have amped risk appetites, or perhaps diversified risk, by adding to cryptocurrency ETFs and leveraged single stock exchange-traded-fund (LETFs) and inverse single stock ETFs. Notably, both crypto ETFs and single stock LETFs and inverse ETFs have been approved in just the last two years. After waiting a decade for regulatory approvals7, a total of 36 spot Bitcoin ETFs, with most launched in January 2024, are now trading with assets exceeding $61B in assets under management8. Single stock LETFs and inverse single-stock ETFs, approved in July of 2022, have proliferated and commanded attention with a new launch seemingly every week. Impressively, the r/LETFs community on reddit boasts 32k members! 9 Utilizing these instruments, investors can deploy leveraged stock bets, without the need for margin or an understanding of complex derivatives. Additionally, investors need not meet the high capital requirements necessary to trade futures. Yet, the moves in these positions can be quite large. When markets and stocks rise, the upside may seem too irresistible to pass up despite the level of risk.
“Volatility is the name of the game with single-stock ETFs. These ETFs have the potential to generate extreme losses over a very short time period." - Emily Doak, director of ETF and index fund research at Schwab Center for Financial Research10
Animal spirits are alive and well. With the inflation fight declared victorious by many and more interest rate cuts projected, the Federal Reserve seemingly has played the part of an enabler for speculators. Counterintuitively, as the Fed and market participants take a victory lap on inflation, precious metals have spiked with spot gold and silver prices both up over 30% year-to-date through mid-October; gold prices have pierced $2,700 per ounce to an all-time high. Interestingly, the retailer Costco, which began selling physical gold in June 2023, has reported that gold bars have been “flying off the shelves.” 11
“What has been happening to the gold price is not just unusual in terms of traditional economic and financial influences. It also goes beyond strict geopolitical influences to capture a broader phenomenon which is building secular momentum. As it develops deeper roots, this risks materially fragmenting the global system and eroding the international influence of the dollar and the US financial system.”12 – Mohamed El-Erian
As we have written in previous blog posts, we have noted that we believe money flows into passive products are distorting market behavior. Many passive funds are market cap weighted, creating overvaluation in many of the largest names. Per the recent JP Morgan Market Insights, the top 10 largest securities in the S&P 500 trade for over 30x earnings* and presently comprise over 35% of the market capitalization of the S&P 50013.
Our current view of the market is that it appears optically expensive, but there are plentiful values to be found just beneath the surface of the mega caps. Beneath the top ten, the remaining 490 stocks trade at a more reasonable 18.4x13.
We are finding values away from the mega cap stocks, mainly in market capitalizations sub $100B. With the S&P 500 dividend yield at near a two-decade low of around 1.25% at the time of writing this piece14, and an interest rate cutting cycle just beginning, we think the dividend paying stocks that relatively underperformed in 2023 may become much more attractive. Additionally, we are finding several stocks that have been deploying capital into share buybacks.
PORTFOLIO REVIEW15*
Our current long portfolio is comprised of what we believe to be quality compounders prudently deploying cash through stock buybacks and dividends. We think several of our long positions could also be identified as special situations.
One of our largest long positions, Lamb Weston Holdings, Inc. (LW) recently attracted activist attention from Jana Partners. On October 17, Jana filed a 13D noting it owns over 5% of the shares outstanding of the $11B global potato supplier. Jana noted that it is working with Continental Grain and former LW executive chairman, Timothy McLevish to explore strategic alternatives that could include a sale of the company. Interestingly, Jana has deep knowledge of the company as it pushed to have LW spun-off from Conagra Brands, Inc. (CAG) in 2016. LW has experienced several missteps recently that included an unsuccessful enterprise resource planning system implementation resulting in missed financial projections and a material sell-off in its stock price. We are confident there is significant value in Lamb Weston shares, and we expect to remain shareholders through the strategic review. We think there will be significant interest from prospective acquirers, and we believe material upside exists from today’s level.
On the short side of the ledger, we continue to remain short the consumer sector across companies that have exposure to the middle- and lower-income consumer. We are currently short several retailers and restaurants. More recently, we have added short exposure to companies in the financial sector, specifically, market sensitive names that trade for what we believe to be extreme valuations on both an absolute and relative level. Additionally, we find the financial disclosures to be opaque and potentially fraught with risk. We think short financial exposure could help provide downside protection in the event of increased market volatility.
View LBAY top 10 holdings here. Holdings are subject to change. Characteristics and metrics of the companies shown are for the underlying securities in the fund’s portfolio and do not represent or predict the performance of the fund. There is no guarantee that a company will pay or continually increase its dividend.
FINAL THOUGHTS
We hope our investor partners enjoy our monthly perspectives. We are finding many compelling ideas both long and short and we look forward to continuing our dialogue in the weeks and months ahead.
