Dear GFGF shareholders,
Thank you for your investment in the Guru Favorite Stocks ETF (“GFGF” or the “Fund”). The information presented in this letter relates to the operations of the Fund for its fiscal period beginning on its inception on Dec. 16, 2021 through Nov. 30, 2022 (“FY 2022”).
The Fund is an actively-managed exchange-traded fund (“ETF”) that seeks to achieve its investment objective of long-term capital appreciation by investing in high-quality companies that are favored by prominent long-term investors (“Gurus”) and at reasonable prices (“Guru Strategy”). The Fund’s sub-adviser, GuruFocus Investments, LLC (“GuruFocus”), tracks the equity portfolio holdings of approximately 20 Gurus. To be considered a Guru, the investor must have a long-term, publicly available track record of at least 10 years. In addition, the Guru must follow an investment strategy of investing in companies that the Guru considers to be high quality. The list of Gurus will generally remain consistent absent unusual circumstances – for example, the retirement of a particular Guru.
For FY 2022, GFGF was down 14.19% at its market price and down 14.50% at net asset value (NAV). Over the period, GFGF underperformed the Solactive GBS United States 1000 NTR Index, which was down 13.81%.
The stock market has been challenging since the birth of GFGF. As the Federal Reserve dramatically increased the federal funds rate to curb inflation, the market had its first down year since 2009. The sector that did extraordinarily well this year was energy, which we did not own following the Fund’s Guru Strategy. Therefore, we underperformed during the first half of 2022. However, during the second half of 2022, our portfolio recovered better than the broader market, although it still underperformed the market slightly.
While I would love to do better than this, the performance of GFGF is consistent with the historical performance of the Guru Strategy, which outperformed the S&P 500 in 13 out of the last 17 years and may underperform from time to time. We will not make changes to our investment strategy due to any underperformance in the short term.
The best and worst performers of the Fund are listed below based on their contribution to the Fund’s return over FY 2022, taking into consideration the weighting of each security.
The best-performing security in the Fund’s portfolio during FY 2022 was Fair Isaac Corp. (FICO, Financial), which returned 51.72%. The second best-performing security was Progressive Corp. (PGR, Financial), which returned 30.63%. The third best-performing security for the period was Elevance Health Inc. (ELV, Financial), which returned 19.94%.
The worst-performing security in the Fund’s portfolio during FY 2022 was Jones Lang LaSalle Inc. (JLL, Financial), which returned -41.74%. The second worst-performing security was First Republic Bank (FRC, Financial), which returned -37.17%. The third worst-performing security was Amazon.com Inc. (AMZN, Financial), which returned -36.92%.
GFGF distributes income to shareholders on an annual basis.
Outlook
The decline of the stock market in 2022 was mainly caused by two factors. The first was the increase of the federal funds rate by the Federal Reserve to curb inflation. The second was the high valuation of stocks at the beginning of the year, when the CAPE PE of the S&P 500 was at the second-highest level in history, only exceeded by the dot-com bubble during the year 2000. As Warren Buffett (Trades, Portfolio) once said, interest rates are to the value of assets what gravity is to matter, so it is not surprising that we have seen the decline of the prices of almost all assets: stocks, bonds, houses, etc.
After the decline of the market in 2022, both aspects are now positive. First, the Federal Reserve has slowed its pace in increasing the federal funds rate and is probably at the later stage of the rate hike cycle, as inflation is cooling down. Second, stocks are much cheaper now. The CAPE PE of the S&P 500 is now close to its 20-year average. Stocks are relatively more fairly valued now.
The decline of valuations is also reflected on individual stocks. If we look at the largest 20 companies by market cap, their PE ratios have a median decline of 27%. The PE ratios for the top three giants, Apple, Microsoft and Alphabet, have declined by more than 30%. Now we can find some stocks with strong earnings potential trading at low valuations.
The stocks are certainly much cheaper, but there is a large cloud hanging in the future. The deeply inverted yield curve is implying that an economic recession is not far away. While I have no strong opinion on whether there will be a recession, I believe that even if there is one, it won’t be as bad as the ones in 2008 and 2001. This is because most companies, especially the giant ones such as those I mentioned above, are all in great financial shape and are extremely profitable. They will act as the anchor for the economy during the turbulence that may come in the future. Earnings may drop for some companies, but the economy will be resilient.
Over the next couple of months, there will be more bad news coming: economic slowdowns, earrings declines, stubborn inflation, higher interest rates, higher unemployment rates, etc. But it is news like this that generates opportunities for long-term investors. Waiting for better times to invest is never a winning strategy. Just like Warren Buffett (Trades, Portfolio) wrote in his October 2008 article, “Buy American, I Am,” as the financial crisis was unfolding, “if you wait for the robins, spring will be over.”
I believe that the companies with high-quality characteristics and reasonable valuations will do better at this time. That is the Guru Strategy that the Fund follows.
As I said many times before, I cannot guarantee the performance of the Fund. What I can guarantee is that the majority of my net worth is invested in GFGF and thus has the same rate of return. I didn’t sell even one share and never will as long as I am the fund manager. I will buy more as I have more funds to deploy. All three of my children also own GFGF. GFGF is among the largest holdings for them.
We appreciate your continued investment in the Fund.
Sincerely,
Charlie Tian, Ph.D.
Chief Executive Officer
GuruFocus Investments, LLC
Here are the answers and explanations to some of the questions that I have received from shareholders.
Is GFGF liquid enough if I want to buy or sell large amounts?
Although GFGF is a relatively small ETF, and sometimes the traded volume is small, the liquidity of GFGF is dependent only on the trading volumes of the stocks in the portfolio. All of our stocks are large companies with high trading volumes. Therefore, GFGF is very liquid as well. You can trade large volumes of GFGF without any problems.
Why does the price of GFGF sometimes not change during the day?
For all ETFs, there are two numbers: its trading price and its net asset value. The net asset value changes constantly during trading hours, as the prices of the stocks in the portfolio change. But the ETF’s trading price will change only if there is a trade with the ETF. Therefore, there is a premium/discount between the trading price and the net asset value. But even if the ETF is not traded for a long time, the next time someone wants to trade, the trading price will still be around the net asset value instead of the price it was traded last time.
Why do GFGF prices sometimes seem out of sync with the changes of the stock prices of the holdings?
This is caused by the discrepancy between the trading price and the net asset value. It is usually a small number, within +/- 0.5%. But if you look at the daily changes, it may appear to be out of sync with the changes of the stock prices in the holdings.
Because of this, sometimes it might be helpful to use a limit order when buying an ETF, as a limit order can limit the price to a small range from the net asset value. You can find the net asset value of GFGF here: https://gurufocusetf.com/gfgf/
