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LBAY: An ETF Unicorn Worth Knowing About

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The unicorn and golden coins for commencement up aliases business conception 3d rendering

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by Rob Isbitts

Leatherback Long/Short Alt Yield ETF (LBAY) is 1 of nan much unsocial ETFs around. That said, it does not tally a unsocial strategy. However, it has brought to nan ETF world thing much commonly recovered successful hedge funds and communal funds. Namely, an actively-managed long-short strategy.

The ETF building allows investors to spot nan managers' holdings connected a regular basis, which has agelong been taboo successful nan hedge money world. Fortunately, LBAY is much than conscionable a uncommon building for an ETF. It has performed. And, much important than its past capacity is really it goes astir generating that performance.

As a large portion of nan Modern Income Investor ngo is to radiance nan spotlight connected smaller ETFs that we deliberation are worthy a look, LBAY is now good into nan "reviewable zone" for me. And I for illustration what I see, conscionable arsenic I did a while backmost erstwhile it was only trading "by appointment" arsenic nan aged Wall Street saying goes. We are adding it to our "undiscovered ETFs" watchlist and initiating our sum of LBAY pinch a Hold rating. That said, while location whitethorn beryllium immoderate near-term headwinds, this ETF looks intriguing arsenic a domiciled subordinate successful a broader portfolio, arsenic its methodology whitethorn correspond a bully complement to a much accepted equity portfolio.

Strategy

LBAY is fundamentally a long-short hedge money successful an ETF wrapper. Its extremity is simply a operation of maturation of main and income, but it besides emphasizes downside protection, utilizing nan short broadside of nan portfolio and immoderate covered telephone premium income to prosecute this.

LBAY is actively-managed, not based connected search a circumstantial index, arsenic is nan lawsuit pinch nan immense mostly of ETFs. It invests successful 2 superior ways nether 1 roof:

1. Long positions successful communal stocks (and occasionally bonds aliases preferred stocks) that nan managers deliberation connection semipermanent "shareholder yield" (a operation of dividend payments, stock buybacks and indebtedness paydowns).

2. Short positions successful stocks that nan managers expect to diminution successful price.

LBAY intends to run successful a nett vulnerability scope (long vulnerability minus short exposure) of 75% - 110% long.

ETF Grades

  • Offense/Defense: Offense

  • Segment: Tactical

  • Sub-Segment: Long-Short

Technical Ratings

  • Short-Term (next 3 months): D

  • Long-Term (next 12 months): D

Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor

For a elaborate explanation of MII's proprietary method standing system, spot disclosures astatine bottommost of this report.

Holding Analysis

With an actively-managed ETF for illustration this one, analyzing holdings tin beryllium much of a moving target than pinch a low-turnover, automated, quarterly-rebalanced, annually-reconstituted scale ETF. That said, nan 73% humanities turnover complaint intends that capable stays successful spot present to get a consciousness of what nan managers are trying to do. Currently, nan assemblage operation is thing but mundane, pinch Technology stocks astatine only astir 3%, Financials accounting for nan largest information (19%) Healthcare astatine 15%, and Basic Materials, Consumer Discretionary and Consumer Cyclicals each weighted astir 10-11%. That is simply a very un-S&P 500-like weighting, which fits pinch LBAY's mostly go-anywhere attack wrong nan equity market, astatine slightest wrong nan mid-cap and larger institution size. At nan clip of this writing, location were 35 agelong positions and 20 short positions. The longs accounted for astir 122% of assets, and nan shorts astir 33%, putting LBAY astatine astir 90% nett long. There was a rate position of astir 10%. This appears to beryllium a reasonably emblematic allocation, astatine a precocious level, based connected nan fund's nett agelong range.

Strengths

I could return nan easy measurement retired and effort to make a lawsuit for LBAY owed to its beardown performance, particularly since nan assets nether guidance accrued a twelvemonth ago. Below is simply a floor plan of LBAY versus nan SPY ETF. That is beautiful melodramatic outperformance, and it has a batch to do pinch really good nan short broadside of nan portfolio did successful 2022's carnivore market. But it besides has a batch to do pinch nan low-tech allocation connected nan agelong side.

LBAY vs SPY

LBAY vs SPY (YCharts.com)

But arsenic noted above, LBAY's past capacity proves only that it did good past year, and not that it tin do good successful nan future. The only point we tin guarantee astir past capacity of immoderate ETF is this: unless you owned it successful nan past, you can't spell backmost and get that performance. It is successful nan past!

So, while I'm happy to spot that LBAY has shown imaginable to make money erstwhile astir are not, my increasing enthusiasm for this ETF is astir its attack and structure. The long-short style appeals to me, and it appears that nan short broadside of nan portfolio tends to beryllium dominated by immoderate very over-hyped stocks. The measurement markets activity today, erstwhile bubbly banal marketplace segments fall, those declines tin quickly return connected a crash-like tone. That tin perchance make nan short broadside enactment arsenic a bigger hedge to nan larger agelong information of this ETF. The bottom-line: outcomes for illustration LBAY delivered successful 2022. So, past capacity is nice, but much importantly, nan pairing of precocious shareholder output stocks pinch overvalued, over-hyped short positions is what makes LBAY 1 to watch.

Weaknesses

The problem pinch markets these days is that they person this unspeakable wont of suspending reality. In different words, stocks that person nary logic to beryllium bid up, and up, and up, tin enactment up overmuch longer than basal study would suggest. That tin wounded LBAY some ways, arsenic nan short broadside of nan portfolio melts down while nan agelong broadside gains, but not vigorously, fixed that higher-quality stocks thin to beryllium de-emphasized successful nan astir "FOMO"-driven markets.

Opportunities

I person tracked this ETF from a region since it was first launched successful precocious 2020. My ain history arsenic a master investor is successful a related style, and truthful erstwhile I look for ETFs to put in, I thin to look successful immoderate obscure places. A twelvemonth ago, LBAY was astir arsenic obscure arsenic it gets. A twelvemonth ago, it had amassed only astir $7mm successful AUM. But nan past twelvemonth has seen a surge successful assets to conscionable astir nan $100mm people arsenic of this penning (see floor plan below). That makes LBAY a viable consideration.

ChartData by YCharts

Furthermore, nan existent chaotic equity marketplace situation is apt to supply an opportunity to usage this strategy either tactically aliases arsenic an "alternative allocation" wrong a larger portfolio.

Threats

The existent banal marketplace is simply a threat to immoderate strategy that includes stocks. That is, nan operation of Fed-obsession, meme stocks, algorithmic trading and each of nan caller factors that make this "not your parents' banal market" are nan biggest concerns immoderate investor should person astir an ETF for illustration LBAY that intends to present a long-short portfolio based connected what reasonably should happen: fundamentally-strong businesses that do good by their shareholders via beardown shareholder output are rewarded, while "zombie" companies that past only connected their expertise to get much (i.e. summation aliases rotation complete their indebtedness obligations) bent successful for longer than Freddy Krueger of scary movie fame. Will 2023 beryllium much for illustration 2022, erstwhile rationality won out, aliases much for illustration 2021, erstwhile meme stocks were king? We'll see.

Conclusions

ETF Quality Opinion

LBAY has my attention. I will beryllium search it closely. Fortunately, dissimilar hedge costs and hedged communal funds, this hedged equity ETF discloses its holdings daily. So investors tin watch and analyse connected a regular ground if they wish.

ETF Investment Opinion

I complaint LBAY a Hold for now, erstwhile looking astatine it nan measurement I do successful each of my ETF profiles connected Seeking Alpha. That is, I americium viewing it successful isolation, not arsenic portion of a broader portfolio I mightiness conception and manage. LBAY has entreaty arsenic a "role player" successful a broader ETF portfolio, wherever that domiciled is to adhd a non-traditional constituent that tin capitalize connected a assortment of marketplace conditions, not simply a bull marketplace aliases carnivore marketplace rally.

This article was written by

Modern Income Investor floor plan picture

The conception of Modern Income Portfolios was created by seasoned finance strategist Rob Isbitts, a erstwhile finance advisor who sold his believe successful 2020 to attraction connected converting his decades of portfolio building and investigation into thing that could beryllium delivered successful a subscription-based format. The result: Modern Income Investor! Modern Income Investor is connected a ngo to lick nan biggest finance situation of this era: spinning disconnected regular distributions from portfolio profits, while keeping nan main magnitude intact. This is what securities for illustration firm bonds and dividend stocks utilized to do well, but do not anymore. We prosecute this by offering subscription-based finance research, exemplary portfolios and timely insights, communicated successful a concise, easy-to-use format.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Additional disclosure: Modern Income Investor's proprietary method standing strategy was created by nan firm's founder, Rob Isbitts, a chartist for much than 40 years. The ratings stress risk-management, and nan belief that while immoderate finance tin admit successful value astatine immoderate time, each finance carries a different level of imaginable for awesome loss. The equilibrium of reward and consequence is calculated each nighttime for thousands of securities, utilizing a look that analyzes value trend, spot of that inclination and cardinal value levels. It analyzes information complete aggregate clip frames to nutrient a short-term standing (looking 3 months out) and a semipermanent standing (looking 12 months out).

Editor: Naga



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