The new AdvisorShares STAR Global Buy-Write ETF (VEGA), launched September 18, 2012, is an actively managed fund-of-funds ETF that intends to provide consistent, repeatable returns across all market cycles. VEGA’s targeted outcome is managed by a proprietary strategy, which happens to have the same name as its ticker symbol – VEGA (“Volatility Enhanced Global Appreciation”). Partnervest Advisory Services, LLC serves as the fund’s subadvisor and portfolio manager.
VEGA’s VEGA is a global asset allocation strategy with covered call and put option overlays. The new ETF writes (sells) call options against each position seeking price appreciation and consistent income. The strategy also employs sales of cash-secured put options. When volatility is low, the portfolio manager buys protective put options to manage downside risk.
I could not locate a description of the global asset allocation process, although the current holdings include cash at 54.5%, SPDR S&P 500 (SPY) 15.0%, iShares MSCI Emerging Markets (EEM) 14.9%, iShares DJ US Real Estate (IYR) 7.4%, and Energy Select Sector SPDR (XLE) 7.3%. Current option overlays include calls sold against the four equity positions along with purchased puts on SPY and iShares iBoxx $ High Yield Corporate Bond (HYG).
Partnervest has been managing similar accounts since October 2008. As of June 30, 2012, its VEGA Composite has a 1-year return of -0.5% versus +5.4% for the S&P 500 and an annualized 3-year return of +7.7% compared to +16.5% for the S&P 500. No risk metrics for the Composite are provided.
VEGA has an expense ratio of 2.01%, consisting of a 1.35% management fee, 0.42% in acquired fund fees, and 0.24% of other expenses. Additional information is located in the press release, overview page, fact sheet (pdf), and prospectus (pdf).
Analysis/Opinion: Despite all the “additional information links” provided above, there is an abundance of unknowns about VEGA. Here are my top three concerns:
- The marketing literature states “VEGA can structure a target outcome” but fails to tell us what that target is. Not even a hint.
- Most investors embark on a covered call strategy as a means of increasing income or reducing risk. VEGA’s literature does not provide any insight as to what investors should expect with regards to yield and distributions, other than distributions are planned to occur only once per year. No volatility, drawdown, or other risk measurements were provided for the manager’s VEGA Composite.
- The underlying global asset allocation is currently 54.5% in cash and money market, yet the strategy used to determine this allocation is not described or even mentioned.
The STAR acronym holds a prominent position in the fund’s name. It is assumed to be an acronym since it is written in all caps, although no description is provided. Someone suggested it means that investors seeking answers to three unknowns above should look to the stars.
VEGA faces entrenched competition. Current products in the covered-call space include:
- PowerShares S&P 500 BuyWrite (PBP) has a 0.75% expense ratio, a 1-year return (as of 6/30/12 to allow a proper comparison) of +7.5%, and a 12-month yield of 9.7%.
- iPath CBOE S&P 500 BuyWrite Index ETN (BWV) has a 0.75% expense ratio, a 1-year return (as of 6/30/12) of +6.8%, and no distribution yield because it tracks a total return index.
- Gateway Fund (GATEX) has a 0.94% expense ratio, a 1-year return (as of 6/30/12) of +3.5%, a nearly 35-year record of supplying superior risk-adjusted performance, and a yield of 1.3%. This mutual fund is available in three share classes (A-GATEX, C-GTECX, and Y-GTEYX) with different fee and expense structures. Consult your advisor as to which is the best choice for your particular situation.