Spear Alpha ETF (SPRX) Q3 2024 Performance: AI Sector Insights and Portfolio Shifts

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On Tue, 24 Dec, 8:01 AM UTC

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Spear Advisors' Q3 2024 fund letter for SPRX ETF reveals performance challenges amid macro headwinds, but highlights emerging growth in AI hardware, data infrastructure, and applications. The fund is shifting focus to offense, expanding investments in data center hardware and AI applications.

Spear Alpha ETF Performance and Market Overview

Spear Advisors' Q3 2024 fund letter for their flagship Spear Alpha ETF (NASDAQ:SPRX) provides insights into the fund's performance and the evolving AI technology landscape. SPRX experienced a 3% decline in Q3 2024, underperforming compared to the S&P 500 and Nasdaq Composite, which saw gains of 5% and 2% respectively 12. The quarter was characterized by significant macro headwinds, including carry trade unwind, election uncertainty, and interest rate concerns 1.

Emerging Growth Trends in AI Sectors

Despite ongoing challenges, Spear Advisors has identified several areas of emerging growth in the AI sector:

  1. Hardware Expansion: While Nvidia (NASDAQ:NVDA) dominated revenue growth in 1H24, the upside is now broadening to custom chips, networking, and power generation. Cloud Service Providers (CSPs) are entering the custom chip space, and new data centers are driving demand for physical infrastructure 13.

  2. Data Infrastructure Recovery: After several quarters of negative growth in new business bookings (net new ARR), even for companies with 20%+ revenue growth, this metric has recently turned positive 12.

  3. AI Applications Progress: Companies in the AI applications space are reaching significant technological milestones, although this progress is not yet reflected in earnings 13.

Portfolio Adjustments and Performance

Spear Advisors has made several key changes to their portfolio in response to market conditions:

  1. Data Center Hardware: The fund experienced mixed performance in this sector. Nvidia outperformed, while Marvell (NASDAQ:MRVL) and AMD (NASDAQ:AMD) underperformed. The fund increased its position in Marvell but reduced exposure to AMD due to the growing traction of custom chips 12.

  2. Power Generation & Materials: Constellation Energy (NASDAQ:CEG) was a top performer following the announcement of the Three Mile Island nuclear plant reopening. New positions were added in GE Vernova (NYSE:GEV) and Vistra Corp. (NYSE:VST) 12.

  3. Networking: The fund increased its position in Arista Networks (NYSE:ANET) and added new smaller positions in Astera Labs (NASDAQ:ALAB) and Credo Technology Group (NASDAQ:CRDO) 12.

  4. Data Infrastructure and Cybersecurity: This sector underperformed, affected by broader software industry challenges and slower enterprise spending. The fund maintains significant exposure through investments in Snowflake (NYSE:SNOW), Cloudflare (NYSE:NET), Datadog (NASDAQ:DDOG), and Zscaler (NASDAQ:ZS) 12.

  5. AI Applications: The fund has shifted some focus from productivity improvement applications to areas like autonomy and quantum computing. Tesla (NASDAQ:TSLA) is highlighted as a top pick for its transition from EV to full autonomy and robo-taxis 12.

Market Outlook and Risk Management

Spear Advisors maintains its base-case assumption of higher inflation and interest rates but notes that growth is picking up across several areas. The fund has shifted its focus from defense to offense, adding new opportunities throughout the year 13.

To manage risk, the fund employs two main strategies:

  1. Increasing idea velocity during consolidation periods
  2. Taking profits on outperformers and reducing exposure to underperforming investments 2

Looking ahead, Spear Advisors expresses confidence in the broadening capex spending cycle, emerging AI applications, and attractive valuations, particularly in mid-cap software companies 3.

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