The Leatherback Long/Short Alternative Yield ETF (LBAY) (the “Fund”) net asset value (NAV) declined by 3.13% in October, compared to a decline of 2.10% for the S&P 500 Index. LBAY paid its thirty-fifth consecutive monthly distribution, at $0.075 per share in October. This is a 2.62% SEC yield versus the S&P 500 Index dividend yield of approximately 1.65%, and the 10-Year US Treasury yield of 4.932%. Year to date as of October 31, 2023, NAV for the Fund has declined 12.79%, compared to an advance of 10.69% for the S&P 500 Index. NAV performance for the Fund to date since inception (November 16, 2020) has produced a 36.34% cumulative total return and a 11.05% 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 1.32%.
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.
FOMO
In recent weeks the US stock market has experienced a relentless rally. In October, we pointed out that many investors may have been bewildered to see short-term interest rates at elevated levels. Just last month we witnessed the 10-year US Treasury briefly touch a 5% yield. While the speed with which rates increased to those prints was impressive, we are again seeing sharp declines across the curve since peaking at 5%-handles. We would argue the US Federal Reserve Board keeping short term interest rates higher for longer has begrudgingly become accepted as market consensus. Despite this, the market reaction to individual data releases that could indicate interest rate cuts continues to surprise many. We have been intrigued by bond market responsiveness to specific economic number data points and wonder how many market players were expecting this level of volatility in fixed-income investments. Recent favorable Consumer Price Index (CPI) readings coupled with declining oil prices has appeared to cause investor risk appetites to return as inflation may be showing signs of quelling. Could this be another fear of missing out (FOMO) rally as the same handful of stocks continue to lead and hit new highs? This narrowly led market may have legs…what do you think?
UNREALIZED GAIN FOR BIG BANKS?
In the past couple of weeks, the Wall Street Journal (WSJ) has been running multiple stories exposing allegations of a toxic workplace culture with a series of articles outlining improprieties, harassment, and discrimination at the Federal Deposit Insurance Corporation (FDIC). FDIC Chair Martin Gruenberg, who was nominated by President Joe Biden to serve as Chairman last year, is advancing a series of new bank capital rules, with the comment period closing in January 20243. The “Proposed Rules to Strengthen Capital Requirements for Large Banks” requires banks with $100B or more in total assets to “include unrealized gains and losses from certain securities in their capital ratios.4” If you recall, this was a fear that contributed to the collapse of Silicon Valley Bank and Signature Bank. Post the WSJ reporting, GOP lawmakers have been calling for Chairman Gruenberg to resign.
“As a result of these troubling reports and your apparent unwillingness to address them, I call for your resignation so a new chair can restore the professional culture at the FDIC that the American people expect from its institutions.”5 - John Kennedy, US Senator
A change of leadership could be significant as it may call into question the more stringent capital rules. Notably, the Vice Chairman of the FDIC, Travis Hill, voted against the regulatory capital proposals advanced by Chair Gruenberg4. If Chair Gruenberg were to resign, could Vice Chair Hill take over as Chairman, and would implementation of the rules be derailed? It will be interesting to see what more may be reported between now and January when the comment period draws to a close.
PORTFOLIO REVIEW6
“There’s no such thing as a worry-free investment. The trick is to separate the valid worries from the idle worries, and then check the worries against the facts.” – Peter Lynch
We have noted in prior commentaries our bullish positioning in the healthcare sector; specifically, medical devices and related stocks. We thought it would be healthy to revisit how we view the current market set up. Notably, the Dow Jones US Select Medical Equipment Total Return Index fell by over 19% from the end of July 2023 through the end of October. Currently, the index has declined slightly over 10% from July as we write this piece. The buzz related to new glucagon-like peptide-1 (GLP-1) and related weight loss drugs that can be delivered via injection seems to have driven the decline. While the obesity medications are welcome and potentially positive for the manufacturers of these novel drugs, we think the selloff in medical device names is misguided and overdone. In Zimmer Biomet Holdings, Inc’s (ZBH) November earnings call, management argues that it’s a positive for orthopedics and ZBH specifically.
“So why could GLP-1s then be a tailwind for orthopedics? Three compelling reasons. First, if we can lower the patient's BMI below a certain threshold, 40 or 30 in some cases, these patients now become eligible for surgery. And all the data points that we're getting in primary markets like the US is that there is a large percentage of patients who today are not going through surgery because their BMI is too high. Secondly, if a patient does lose the weight and I would say this is pretty logical, and they do become more active, there would be a greater risk for additional joint procedures because there will be injury. And third, if a patient loses weight, they are likely to live longer, again, expanding the patient final for an orthopedic procedure. A great example of these factors is Japan, the second largest market in the world for osteoarthritis with minimum obesity rates, but very, very long life expectancy dynamics. We don't see any near-term impact from GLP-1s, and we've seen the long-term impact would be a positive one for orthopedics and Zimmer Biomet.” – Ivan Tornos, President and CEO, Zimmer Biomet Holdings, Inc. Q3 2023 Earnings Conference Call
We continue to maintain long positions in GE Healthcare Technologies Inc. (GEHC), Johnson & Johnson (JNJ), Medtronic, PLC (MDT), and Zimmer Biomet Holdings, Inc. (ZBH).
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.
"
Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time.” – Warren Buffett
1 The S&P 500 Index includes 500 leading companies and covers approximately 80% of the available market capitalization. The S&P 500 Dividend Yield is the estimated sum of all dividends paid by the index’s stocks in the last 12 months, divided by the index market capitalization as reported by the S&P. The dividend yield does not represent or predict the performance of the Fund. Indexes are unmanaged and it is not possible to invest in an index.
2 The 30-day SEC yield is calculated from the 30 days ending on the last day of the previous month. This figure approximates the yield an investor would receive in a year, assuming that each bond in the portfolio is held until maturity. View the 30 day SEC yield here.
3 Source: https://www.federalreserve.gov/, October 20, 2023
4 Source: https://www.fdic.gov/, July 27, 2023
5 Source: https://www.politico.com/, November 16, 2023
6 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. The Dow Jones U.S. Select Medical Equipment Total Return Index measures manufacturers and distributors of medical devices such as MRI scanners, prosthetics, pacemakers, X-ray machines and other non-disposable medical devices. Indexes are unmanaged and it is not possible to invest in an index.Section Sources: Bloomberg
Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.
Before investing you should carefully consider the Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. A prospectus may be obtained by clicking here. Please read the prospectus carefully before you invest.
“Long” and “short” are investment terms used to describe ownership of securities. To buy securities is to “go long.” The opposite of going long is “selling short.” Short selling is an advanced trading strategy that involves selling a borrowed security. Short sellers make a profit if the price of the security goes down and they are able to buy the security at a lower amount than the price at which they sold the security short.
Since the Funds are actively managed they do not seek to replicate the performance of a specified index. The Funds therefore may have higher portfolio turnover and trading costs than index-based funds.
LBAY Risks: Investing involves risk, including the loss of principal. As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The market price normally should approximate the Fund’s net asset value per share (NAV), but the market price sometimes may be higher or lower than the NAV. The Fund is new with a limited operating history. There are a limited number of financial institutions authorized to buy and sell shares directly with the Fund; and there may be a limited number of other liquidity providers in the marketplace. There is no assurance that Fund shares will trade at any volume, or at all, on any stock exchange. Low trading activity may result in shares trading at a material discount to NAV.
The Fund uses short sales and derivatives (options), both of which may involve substantial risk. The loss on a short sale is in principle unlimited since there is no upward limit on the price of a shorted asset. The potential loss from a derivative may be greater than the amount invested due to counter-party default; illiquidity; or other factors. The Fund may hold illiquid assets which may cause a loss if the Fund is unable to sell an asset at a beneficial time or price.
Through its investments in REITs, the Fund is subject to the risks of investing in the real estate market, including decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems and natural disasters.
The Fund’s exposure to MLPs may subject the Fund to greater volatility than investments in traditional securities. The value of MLPs and MLP based exchange traded funds and notes may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or sectors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments.
BDCs generally invest in debt securities that are not rated by a credit rating agency and are considered below investment grade quality (“junk bonds”). Little public information generally exists for the type of companies in which a BDC may invest and, therefore, there is a risk that the Fund may not be able to make a fully informed evaluation of the BDC and its portfolio of investments.
The Fund is classified as “non-diversified” and may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers.
Foreside Fund Services, LLC, Distributor
Tidal ETF Services, Launch and Structure Partner
Leatherback Asset Management, Foreside Fund Services, and Tidal ETF Services are not affiliated.
Before investing you should carefully consider the Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. A prospectus may be obtained by clicking here. Please read the prospectus carefully before you invest.
“Long” and “short” are investment terms used to describe ownership of securities. To buy securities is to “go long.” The opposite of going long is “selling short.” Short selling is an advanced trading strategy that involves selling a borrowed security. Short sellers make a profit if the price of the security goes down and they are able to buy the security at a lower amount than the price at which they sold the security short.
Since the Funds are actively managed they do not seek to replicate the performance of a specified index. The Funds therefore may have higher portfolio turnover and trading costs than index-based funds.
LBAY Risks: Investing involves risk, including the loss of principal. As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The market price normally should approximate the Fund’s net asset value per share (NAV), but the market price sometimes may be higher or lower than the NAV. The Fund is new with a limited operating history. There are a limited number of financial institutions authorized to buy and sell shares directly with the Fund; and there may be a limited number of other liquidity providers in the marketplace. There is no assurance that Fund shares will trade at any volume, or at all, on any stock exchange. Low trading activity may result in shares trading at a material discount to NAV.
The Fund uses short sales and derivatives (options), both of which may involve substantial risk. The loss on a short sale is in principle unlimited since there is no upward limit on the price of a shorted asset. The potential loss from a derivative may be greater than the amount invested due to counter-party default; illiquidity; or other factors. The Fund may hold illiquid assets which may cause a loss if the Fund is unable to sell an asset at a beneficial time or price.
Through its investments in real estate investment trusts (REITs), the Fund is subject to the risks of investing in the real estate market, including decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems and natural disasters.
The Fund’s exposure to master limited parterships (MLPs) may subject the Fund to greater volatility than investments in traditional securities. The value of MLPs and MLP based exchange traded funds and notes may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or sectors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments.
Business Development Companies (BDCs) generally invest in debt securities that are not rated by a credit rating agency and are considered below investment grade quality (“junk bonds”). Little public information generally exists for the type of companies in which a BDC may invest and, therefore, there is a risk that the Fund may not be able to make a fully informed evaluation of the BDC and its portfolio of investments.
The Fund is classified as “non-diversified” and may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers.
Foreside Fund Services, LLC, Distributor
Tidal ETF Services, Launch and Structure Partner
