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ESOTERICA THEMATIC TRUST Esoterica NextG Economy ETF |
TABLE OF CONTENTS
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22 |
The Rolling Correction of Semiconductors?
It is well understood that the consumer electronics market, including PCs and smartphones, has been weak over the past few quarters as the strong demand during the peak COVID -19 (“COVID”) period proved unsustainable. As macro uncertainty picks up and demand weakens, hardware Original Equipment Manufacturers (OEMs) are becoming increasingly cautious about the future and not replenishing inventories, creating a typical inventory down cycle in these markets. Semiconductor companies in the PC and smartphone supply chain expect their Q4 revenue to be 20% below prior expectations across the board. Advanced Micro Devices, Inc. (AMD) saw its PC -related revenue cut by half as it tried to correct the inventory situation as quickly as possible by meaningfully under -shipping the end demand.
Inventory correction is common after periods of strong demand, but it is much more severe this time due to the supply -demand imbalance over the past two years. It usually takes a few quarters to work through the inventory in the channel and when the end demand stabilizes, customers rebuild inventory, and the cycle starts again. These inventory corrections create much volatility in the markets and are short -term in nature. Inventory corrections also often mark the bottom for the stocks as the bar gets reset lower.
However, the worry is that with a looming recession, it is just a matter of time before things break down in other markets that are further away from consumers (datacenter, automotive), creating this “Rolling Correction of Semiconductor” narrative. It seems that demand in those markets is holding up much better, at least for now, according to the companies that reported recently. Still, we do not doubt that sentiment could turn negative swiftly with just a few negative comments. We don’t think there is a definitive answer, and we can’t prove this theory one way or another, but we believe these are fundamentally better markets with stronger growth, longer product cycles, higher margins, and stickier customers. If such inventory correction happens, it’s likely to create a good opportunity for long -term gain.
Understanding the Market Through Valuation Framework
By and large, equity valuation is anchored to interest rates. For example, the 10 -year real yield is the return of risk -free assets after adjusting for inflation. When the real yield falls, equity valuation goes up, and vice -versa . There are other driving factors, such as the curvature of the yield curve and the implied volatility of rates. They could determine the tightness of financial conditions, which subsequently affects the valuation of risky assets.
Through this lens, we could make sense of the fluctuation of equity valuation in the past month. Coming into October, stronger -than -expected inflation data and labor market print, plus the continued hawkish tone from the U.S. Federal Reserve Board (“Fed”) and chaos out of the UK markets, have put much pressure on rates and the implied volatility of rates. These forces together brought down the valuation. However, the valuation held up relatively better, given that these driving factors were much worse than previous lows in June. The curvature of the yield curve, indicating an easier monetary policy stance, gave much -needed support to equities.
When the narrative of a slower pace of hiking rates due to concerns over financial stability and recessions gained more momentum, the curvature and the implied volatility started to lift the valuation, despite the rates remaining suspicious. This dynamic remained largely the same even after a dovish Federal Open Market Committee (FOMC) statement but a hawkish press in early November. Rates implied a tighter monetary policy stance than that indicated by the curvature and the implied volatility. As a result, the equity valuation got stuck in between.
Looking forward, in the absence of another significant inflation shock, we might stay in this “gridlock” before the Fed finally pivots. It’s a data -dependent process, as these driving factors will likely fluctuate within the range depending on the incoming inflation print. In other words, the equity’s valuation might have found the bottom, but the Fed’s “Higher for Longer” also caps the upside until data proves otherwise.
1
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ESOTERICA THEMATIC TRUST Esoterica NextG Economy ETF LETTER TO SHAREHOLDERS (unaudited) (continued) |
“Higher for Longer” Is Earning’s Problem
We voiced our concerns that the Fed’s higher -than -usual tolerance for deteriorating fundamentals could impose more downside risk on equities. The negative earnings per share (EPS) revisions could hit investors before the Fed pivots. Unfortunately, this has happened during this earnings season. The companies, ranging from large -cap high -quality FAANG* stocks to smaller and already beaten -down software as a service (SaaS) companies, all gave gloomy guidance without much exception, citing the challenging macro environment in the coming quarters. As a result, the stocks got hit by disappointing earnings without much support from valuations.
Worse, this situation could last as long as the Fed is convinced that “Higher for Longer” is the right policy stance. Although we tend to believe that the Fed underestimates how tight its monetary policy has been, the damage could be done before the Fed realizes it. The companies’ durable and resilient earnings in the coming quarters offer the best risk management in this environment. That’s where we should spend the most time on.
* FAANG is an acronym that refers to the stocks of five American technology companies: Meta (formerly known as Facebook), Amazon, Apple, Netflix and Alphabet (formerly known as google).
2
GROWTH OF $10,000 INVESTMENT AT NET ASSET VALUE (“NAV”) AND MARKET PRICE
|
Average Annual Return as of October 31, 2022 |
One Year |
Since Inception
|
||
|
Esoterica NextG Economy ETF (NAV) |
(48.08)% |
10.15% |
||
|
Esoterica NextG Economy ETF (Market Price) |
(48.05)% |
10.08% |
||
|
MSCI All Country World Index SM1 |
(10.61)% |
17.98% |
||
|
S&P 500 Index® 2 |
(23.56)% |
13.05% |
This chart represents historical performance of a hypothetical $10,000 investment made in the Esoterica NextG Economy ETF (the “Fund”) on March 30, 2020. Assumes reinvestment of dividends and capital gains, but does not reflect the effect of any applicable sales charge or redemption fees. This chart does not imply any future performance.
The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares.
* The inception date is the date the Fund started accruing expenses and commenced operations. Shares of WUGI were listed on the Cboe BZX Exchange, Inc. on March 30, 2020.
1 The MSCI All Country World Index (“ACWI”) is a market -cap -weighted global equity index that tracks emerging and developed markets. It currently monitors nearly 3,000 large- and mid -cap stocks in 48 countries.
2 The Standard & Poor’s (“S&P”) 500 Index is an unmanaged index consisting of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market -weighted index (stock price times number of shares outstanding) with each stock’s weight in the Index proportionate to its market value.
The performance shown represents past performance. Past performance does not guarantee future results. Current returns may be lower or higher. The investment return and principal will fluctuate so that an investor’s shares when sold may be worth more or less than the original cost. The graph above does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Fund’s most recent month -end performance can be obtained by calling 1 -833-297-2587 . Returns for less than one year are not annualized.
The annual net operating expense ratio as provided in the Prospectus dated March 1, 2022 was 0.75%. Esoterica Capital LLC (the “Adviser”) has contractually agreed to reduce its fees and / or reimburse expenses of the Fund until at least February 28, 2023, to ensure that total annual fund operating expenses after fee waiver and / or reimbursement (exclusive of: (i) any front -end or contingent deferred loads; (ii) brokerage fees and commissions; (iii) unaffiliated acquired fund fees and expenses; (iv) fees and expenses associated with investments in other collective investment vehicles or derivative instruments (including for example option and swap fees and expenses); (v) borrowing costs (such as interest and dividend expense on securities sold short) (vi) taxes; (vii) foreign custody transaction costs and foreign account set up fees and (viii) extraordinary expenses such as litigation expenses (which may include indemnification of Fund officers and Trustees, and contractual indemnification of Fund service providers, including the Adviser)) will not exceed 0.75% of the Fund’s net assets. The Fund’s total returns would have been lower had the Adviser not waived a portion of the Fund’s expenses.
3
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ESOTERICA THEMATIC TRUST Esoterica NextG Economy ETF PERFORMANCE SUMMARY (unaudited) (continued) |
NAV returns are based on the dollar value of a single share of the Fund, calculated using the value of the underlying assets of the Fund minus its liabilities, divided by the number of shares outstanding. The NAV is typically calculated at 4:00 pm Eastern time on each business day the New York Stock Exchange (“NYSE”) is open for trading. Market returns are based on the trade price at which shares are bought and sold on the Cboe BZX Exchange using the last share trade. Market performance does not represent the returns you would receive if you traded shares at other times. The Fund’s performance assumes the reinvestment of all dividends and capital gains on ex -date for NAV returns and payable date for Market Price returns. The market price of the Fund’s shares may differ significantly from their NAV during periods of market volatility. The referenced indices are shown for informational purposes only and are not meant to represent the Fund.
This material must be preceded or accompanied by a prospectus.
One cannot invest directly in an index.
4
|
Security Description |
Country |
Shares |
Fair Value |
||||
|
Common Stocks – 91.3% |
|
||||||
|
|
|||||||
|
Automobiles – 5.2% |
|
||||||
|
Tesla, Inc. (a) |
United States |
3,759 |
$ |
855,323 |
|||
|
|
|||||||
|
Entertainment – 3.0% |
|
||||||
|
Netflix, Inc. (a) |
United States |
1,091 |
|
318,441 |
|||
|
Sea Ltd., ADR (a) |
Singapore |
3,352 |
|
166,527 |
|||
|
|
484,968 |
||||||
|
Hotels, Restaurants & Leisure – 2.3% |
|
||||||
|
Airbnb, Inc. Class A (a) |
United States |
3,553 |
|
379,851 |
|||
|
|
|||||||
|
Interactive Media & Services – 6.1% |
|
||||||
|
Alphabet, Inc. Class C (a) |
United States |
9,010 |
|
852,886 |
|||
|
Tencent Holdings Ltd. |
China |
5,892 |
|
154,321 |
|||
|
|
1,007,207 |
||||||
|
Internet & Direct Marketing Retail – 9.6% |
|
||||||
|
Amazon.com, Inc. (a) |
United States |
9,010 |
|
922,985 |
|||
|
JD.com, Inc. Class A |
China |
409 |
|
7,560 |
|||
|
Meituan Class B (a)(b) |
China |
41,008 |
|
651,961 |
|||
|
|
1,582,506 |
||||||
|
IT Services – 8.2% |
|
||||||
|
Adyen NV (a)(b) |
Netherlands |
113 |
|
162,232 |
|||
|
Block, Inc. Class A (a) |
United States |
1,337 |
|
80,314 |
|||
|
Cloudflare, Inc. Class A (a) |
United States |
4,428 |
|
249,385 |
|||
|
MongoDB, Inc. Class A (a) |
United States |
1,834 |
|
335,677 |
|||
|
Snowflake, Inc. Class A (a) |
United States |
3,230 |
|
517,768 |
|||
|
|
1,345,376 |
||||||
|
Semiconductors & Semiconductor Equipment – 32.0% |
|
||||||
|
Advanced Micro Devices, Inc. (a) |
United States |
25,380 |
|
1,524,324 |
|||
|
Marvell Technology, Inc. |
United States |
32,492 |
|
1,289,283 |
|||
|
NVIDIA Corp. |
United States |
6,371 |
|
859,894 |
|||
|
QUALCOMM, Inc. |
United States |
5,873 |
|
691,017 |
|||
|
Synaptics, Inc. (a) |
United States |
2,309 |
|
204,577 |
|||
|
Taiwan Semiconductor Manufacturing Co. Ltd. |
Taiwan |
47,000 |
|
568,857 |
|||
|
Wolfspeed, Inc. (a) |
United States |
1,753 |
|
138,049 |
|||
|
|
5,276,001 |
||||||
The accompanying notes are an integral part of the financial statements.
5
|
ESOTERICA THEMATIC TRUST Esoterica NextG Economy ETF SCHEDULE OF INVESTMENTS October 31, 2022 (continued) |
|
Security Description |
Country |
Shares |
Fair Value |
||||
|
Software – 24.9% |
|
||||||
|
Atlassian Corp. Class A (a) |
United States |
802 |
$ |
162,589 |
|||
|
Datadog, Inc. Class A (a) |
United States |
11,474 |
|
923,772 |
|||
|
Elastic NV (a) |
United States |
5,654 |
|
361,573 |
|||
|
Microsoft Corp. |
United States |
6,079 |
|
1,411,118 |
|||
|
ServiceNow, Inc. (a) |
United States |
1,151 |
|
484,272 |
|||
|
Workday, Inc. Class A (a) |
United States |
2,411 |
|
375,682 |
|||
|
Zscaler, Inc. (a) |
United States |
2,438 |
|
375,696 |
|||
|
|
4,094,702 |
||||||
|
|
|||||||
|
Total Common Stocks (Cost $22,558,445) |
|
15,025,934 |
|||||
|
Principal |
|||||||||
|
Short-Term Investments – 9.7% |
|
|
|
||||||
|
|
|
|
|||||||
|
Time Deposits – 9.7% |
|
|
|
||||||
|
JPMorgan Chase, New York, 2.43%, 11/01/2022 (c) |
$ |
1,592,845 |
|
1,592,845 |
|
||||
|
Total Short-Term Investments (Cost $1,592,845) |
|
|
1,592,845 |
|
|||||
|
Total Investments – 101.0% (Cost $24,151,290) # |
|
|
16,618,779 |
|
|||||
|
Liabilities, less cash and other assets – (1.0)% |
|
|
(151,499 |
) |
|||||
|
Net Assets – 100.0% |
|
$ |
16,467,280 |
|
|||||
ADR – American Depositary Receipt
(a) Non -income producing security.
(b) Restricted security that may be sold to “qualified institutional buyers” pursuant to the conditions of Rule 144A under the Securities Act of 1933, as amended. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees, unless otherwise noted. At October 31, 2022, the aggregate value of these securities amounted to $814,193 or 4.9% of net assets.
(c) Time deposits bear interest at a variable rate that is based on a variety of factors, including but not limited to relevant overnight and short -term reference rates, the range of distribution between and among the interest rates paid by each eligible Institution on their respective deposits, and the weighted average distribution of interest rates on the deposits. The rate shown is as of October 31, 2022.
# Cost for federal income tax purposes is $24,151,290. Net unrealized appreciation (depreciation) consists of:
|
Gross unrealized appreciation |
$ |
81,133 |
|
|
|
Gross unrealized depreciation |
|
(7,613,644 |
) |
|
|
Net unrealized depreciation |
$ |
(7,532,511 |
) |
|
|
Summary of Investments by Sector^ |
|||
|
Information Technology |
65.1 |
% |
|
|
Consumer Discretionary |
17.1 |
|
|
|
Short-Term Investments |
9.7 |
|
|
|
Communication Services |
9.1 |
|
|
|
Liabilities, less cash and other assets |
(1.0 |
) |
|
|
100.0 |
% |
||
^ As a percentage of net assets.
The accompanying notes are an integral part of the financial statements.
6
|
Esoterica NextG Economy ETF STATEMENT OF ASSETS AND LIABILITIES October 31, 2022 |
|
ASSETS |
|
|
||
|
Investments in securities of unaffiliated issuers, at value |
$ |
16,618,779 |
|
|
|
Cash |
|
3,576 |
|
|
|
Receivable from investment adviser |
|
9,162 |
|
|
|
Prepaid expenses |
|
2,565 |
|
|
|
TOTAL ASSETS |
|
16,634,082 |
|
|
|
|
|
|||
|
LIABILITIES |
|
|
||
|
Payables: |
|
|
||
|
Custody, accounting and administration fees |
|
88,525 |
|
|
|
Audit fees |
|
17,000 |
|
|
|
Legal fees |
|
16,076 |
|
|
|
Trustee fees |
|
14,666 |
|
|
|
Transfer agent fees |
|
7,500 |
|
|
|
Principal Financial Officer fees |
|
6,636 |
|
|
|
Chief Compliance Officer fees |
|
6,614 |
|
|
|
Shareholder reporting fees |
|
3,121 |
|
|
|
Other expenses |
|
6,664 |
|
|
|
TOTAL LIABILITIES |
|
166,802 |
|
|
|
NET ASSETS |
$ |
16,467,280 |
|
|
|
|
|
|||
|
COMPONENTS OF NET ASSETS |
|
|
||
|
Paid-in capital |
|
27,659,432 |
|
|
|
Distributable earnings/(losses) |
|
(11,192,152 |
) |
|
|
NET ASSETS |
$ |
16,467,280 |
|
|
|
|
|
|||
|
NET ASSET VALUE PER SHARE |
|
|
||
|
Net Asset Value |
$ |
32.88 |
|
|
|
Shares of beneficial interest outstanding (unlimited number of Shares authorized, no par value) |
|
500,754 |
|
|
|
|
|
|||
|
COST OF INVESTMENTS |
|
|
||
|
Investments in securities of unaffiliated issuers, at cost |
$ |
24,151,290 |
|
The accompanying notes are an integral part of the financial statements.
7
|
Esoterica NextG Economy ETF STATEMENT OF OPERATIONS For the Year Ended October 31, 2022 |
|
INVESTMENT INCOME: |
|
|
||
|
Dividends from securities of unaffiliated issuers (net of $7,042 foreign withholding tax) |
$ |
100,666 |
|
|
|
Interest income |
|
17,722 |
|
|
|
Total Investment Income |
|
118,388 |
|
|
|
|
|
|||
|
EXPENSES: |
|
|
||
|
Investment advisory fees |
|
228,643 |
|
|
|
Custody, accounting and administration fees |
|
118,349 |
|
|
|
Legal fees |
|
92,500 |
|
|
|
Trustee fees |
|
45,575 |
|
|
|
Principal Financial Officer fees |
|
36,219 |
|
|
|
Chief Compliance Officer fees |
|
36,219 |
|
|
|
Audit fees |
|
17,000 |
|
|
|
Transfer agent fees |
|
10,000 |
|
|
|
Shareholder reporting fees |
|
7,549 |
|
|
|
Registration fees |
|
179 |
|
|
|
Other expenses |
|
21,771 |
|
|
|
Total Expenses |
|
614,004 |
|
|
|
Creation/Redemption Transaction fees waived by the Adviser |
|
(3,000 |
) |
|
|
Investment Advisory fee waiver/reimbursement |
|
(381,752 |
) |
|
|
Net Expenses |
|
229,252 |
|
|
|
NET INVESTMENT INCOME (LOSS) |
|
(110,864 |
) |
|
|
|
|
|||
|
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: |
|
|
||
|
Net realized gain (loss) on: |
|
|
||
|
Investments in securities of unaffiliated issuers |
|
(2,753,596 |
) |
|
|
In-kind redemptions |
|
(702,413 |
) |
|
|
Foreign currency transactions |
|
(2,933 |
) |
|
|
Net realized gain (loss) |
|
(3,458,942 |
) |
|
|
|
|
|||
|
Net change in unrealized appreciation (depreciation) on: |
|
|
||
|
Investments in securities of unaffiliated issuers |
|
(16,174,608 |
) |
|
|
Net change in unrealized appreciation (depreciation) |
|
(16,174,608 |
) |
|
|
NET REALIZED AND UNREALIZED GAIN (LOSS) |
|
(19,633,550 |
) |
|
|
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
$ |
(19,744,414 |
) |
The accompanying notes are an integral part of the financial statements.
8
|
For the
|
For the
|
|||||||
|
OPERATIONS: |
|
|
|
|
||||
|
Net investment income (loss) |
$ |
(110,864 |
) |
$ |
(147,190 |
) |
||
|
Net realized gain (loss) on investments, foreign currency transactions and in-kind redemptions |
|
(3,458,942 |
) |
|
3,678,612 |
|
||
|
Net change in unrealized appreciation (depreciation) |
|
(16,174,608 |
) |
|
6,728,938 |
|
||
|
Net increase (decrease) in net assets resulting from operations |
|
(19,744,414 |
) |
|
10,260,360 |
|
||
|
|
|
|
|
|||||
|
CAPITAL TRANSACTIONS: |
|
|
|
|
||||
|
Proceeds from Shares issued (a) |
|
1,671,569 |
|
|
38,854,282 |
|
||
|
Cost of Shares redeemed (a) |
|
(11,425,487 |
) |
|
(15,090,555 |
) |
||
|
Transaction Fees (Note 5) |
|
3,371 |
|
|
20,182 |
|
||
|
Net increase (decrease) in net assets from capital transactions |
|
(9,750,547 |
) |
|
23,783,909 |
|
||
|
Total increase (decrease) in net assets |
|
(29,494,961 |
) |
|
34,044,269 |
|
||
|
|
|
|
|
|||||
|
NET ASSETS |
|
|
|
|
||||
|
Beginning of Year |
|
45,962,241 |
|
|
11,917,972 |
|
||
|
End of Year |
$ |
16,467,280 |
|
$ |
45,962,241 |
|
||
|
|
|
|
|
|||||
|
CHANGES IN SHARES OUTSTANDING |
|
|
|
|
||||
|
Shares issued |
|
25,000 |
|
|
725,000 |
|
||
|
Shares redeemed |
|
(250,000 |
) |
|
(275,000 |
) |
||
|
Net increase (decrease) in Shares outstanding |
|
(225,000 |
) |
|
450,000 |
|
||
|
Shares outstanding, Beginning of Year |
|
725,754 |
|
|
275,754 |
|
||
|
Shares outstanding, End of Year |
|
500,754 |
|
|
725,754 |
|
||
(a) For the year ended October 31, 2022, the Fund had 250,000 Shares redeemed in -kind with total cost in the amount of $11,425,487. For the year ended October 31, 2021, the Fund had 725,000 Shares contributed in -kind with total proceeds in the amount of $38,854,252 and 275,000 Shares redeemed in -kind with total cost in the amount of $15,090,555.
The accompanying notes are an integral part of the financial statements.
9
|
Esoterica NextG Economy ETF FINANCIAL HIGHLIGHTS Selected Data for a Share of Common Stock Outstanding Throughout each Period Indicated: |
|
For the
|
For the
|
For the
|
||||||||||
|
NET ASSET VALUE, Beginning of Period |
$ |
63.33 |
|
$ |
43.22 |
|
$ |
25.60 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Income (loss) from operations: |
|
|
|
|
|
|
||||||
|
Net investment income (loss) ( a ) |
|
(0.18 |
) |
|
(0.20 |
) |
|
(0.07 |
) |
|||
|
Net realized and unrealized gain (loss) |
|
(30.28 |
) |
|
20.28 |
|
|
17.69 |
|
|||
|
Total income (loss) from operations |
|
(30.46 |
) |
|
20.08 |
|
|
17.62 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Capital Shares Transaction: |
|
|
|
|
|
|
||||||
|
Transaction fees (Note 5) |
|
0.01 |
|
|
0.03 |
|
|
— |
( b )( c ) |
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|
|
|
|
|
|
|
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|
NET ASSET VALUE, End of Period |
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