Thesis
Noble Absolute Return ETF (NYSEARCA:NOPE) is a welcome addition to the exchange listed investment universe. The actively managed exchange traded fund was launched at the end of September 2022. As per its literature:
The Fund is an actively-managed exchange-traded fund (“ETF”) that seeks to achieve its investment objective by purchasing long positions in securities expected to increase in price and/or taking short positions in securities expected to decline in price. The Fund will generally have net exposure ranging from 100% short to 150% long. When the value of the Fund’s outstanding short positions is equal to the Fund’s net assets, the Fund is 100% short. The Fund’s net exposure at any time is the total of the Fund’s percentage long holdings (including leverage) less the percentage of its short holdings. For example, if the Fund’s long holdings totaled 60% and its short holdings totaled 40%, the Fund’s net exposure would be 20% (60%-40%).
A long-short equity strategy works by trying to take advantage of profit opportunities in both potential upside and downside moves expected in different securities/sectors in the market. This strategy identifies and takes long positions in stocks identified as being relatively underpriced while selling short stocks that are deemed to be overpriced. For NOPE, this translates into being long the energy/miners space, while short technology (mainly Tesla at the moment).
We like this fund because it goes for an absolute return strategy:
Basically, an absolute return strategy aims to make money year in, year out. It makes sense at the end of the day to entrust your earnings to a vehicle that will try to post positive returns every year, irrespective of a bull or bear market. Money is what pays bills, and the utility company or the cell phone provider will not care if there is a bear market in terms of collecting what is due from you.
There are many market practitioners who basically tell you that over the long run, equities provide xyz annualized total returns, and you need to be patient during a bear market. It is not that easy, though, when you see your investment portfolio down -20% during certain calendar years. NOPE aims to provide a positive return year in and year out, but it is most certainly not a guaranteed return.
What it is that you are buying here
Ultimately, a retail investor needs to understand that you are buying into Mr. George Noble’s view of the world and his investment acumen:
A long/short equity hedge fund performs as long as the main alpha generator, i.e. Mr. Noble, correctly identifies market trends and sectoral shifts. These types of strategies can be extremely profitable, but they can also be volatile. The current set-up for the fund is to be long energy/miners and short some sub-sectors of tech (mainly Tesla at the moment). Think about this strategy for a second – if this ETF had been created at the beginning of 2022 it would have had an absolute monster year! Energy was up significantly in 2022, while technology was down. The long/short strategy would have been up on both legs, thus mathematically being able to generate 100%/200% types of returns during calendar years. On the flip side, if the portfolio manager is wrong in terms of market views, the losses can be as spectacular.
Hence, you are buying into Mr. Noble’s investment acumen here.
Performance and volatility
The fund can be extremely volatile:
Since inception, the fund is up more than 13%, but it has not been a linear move. We can see the vehicle down almost -20% during the November market rally, only to be up more than 30% at the end of December as Tesla collapsed. As the portfolio ramps up, the volatility will subside a bit more but expect a lot of vol here. This is not an investment vehicle for the faint of heart. Ideally, this would serve as a portfolio diversifier for a retail investor. Do not expect NOPE to post linear results. The fund can be up or down significantly, depending upon fruition of market views.
In the above graph, we are benchmarking NOPE against SARK, the Nasdaq, and the S&P 500. We can see that NOPE and SARK have the most volatile return profiles, but NOPE is by far the most volatile one.
How you should think about NOPE
It is interesting to write about NOPE on the Seeking Alpha platform. The reason behind this is the fact that many authors here have model portfolios and give Buy and Sell ratings on securities. NOPE is basically an exchange traded portfolio of an ‘author’ or portfolio manager in this case. It is a vehicle with a daily mark to market and visibility based on an investor’s world views (in this case Mr. Noble). It would be neat if each Seeking Alpha author would be able to underwrite an ETF and investors just buy into that to monetize that author’s views, but the real world does not work like that. Only a very limited amount of folks can actually have the traction to create an exchange listed vehicle.
Conclusion
NOPE is an actively managed exchange traded fund. The vehicle is an equity long/short fund, and will generally have a net exposure ranging from 100% short to 150% long equities. The portfolio is dynamic and can change every day. George Noble, a well-respected investment manager with a long track record, is the main portfolio manager for this fund. You should think of NOPE as a vehicle to underwrite Mr. Noble’s views on undervalued/overvalued equity sectors. The fund’s performance is very much dependent on the fruition of Mr. Noble’s trading ideas. Being long/short NOPE can be extremely volatile, with commensurate total returns. As an example, in its short life (the fund IPO-ed at the end of September 2022), the fund has been down -20%, as well as up 35%. Expect significant volatility for this absolute total return vehicle, but at the same time expect a fund that will try to post a positive total return year in and year out, irrespective of a bear or bull market.
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