FWDB: August 2020 Portfolio Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/fwdb.

Commentary

FolioBeyond’s algorithm underlying the AdvisorShares FolioBeyond Smart Core Bond ETF (FWDB) returned -0.24% in August versus -0.81% for the Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”). The 10-year Treasury yield rose 0.17% during the month to end at 0.72% yield. SNFBFI’s returns in August were hurt by intermediate/long durations government exposures, partly offset by positive returns in short duration High Yield Corporates and Commercial MBS.  In contrast, the AGG experienced a bigger drawdown due to its longer duration exposure.

PERFORMANCE SUMMARY AS OF AUGUST 31, 2020

  1-Month Return YTD 2020 Return 1-Yr Return 3-Yr Return 5-Yr Return
FWDB (NAV) -0.24% -0.34% 3.31% 3.19% 4.28%
Bloomberg Barclays
U.S. Aggregate Bond Index (“AGG”)
-0.81% 6.85% 6.47% 5.09% 4.33%
Morningstar Multisector Bond Category 0.72% 1.07% 2.67% 3.28% 4.21%
FWDB’s Morningstar Category Percentile Rank 56 57 51
# of Funds in Morningstar Multisector Bond Category 363 342 330 293 251

Source: BNY Mellon, Morningstar.

Performance data quoted represents past performance and is no guarantee of future results. All Fund data and performance data quoted is believed to be accurate, and unless otherwise stated, is sourced from the Fund administrator, the Advisor’s or Sub-Advisor’s proprietary data, and Morningstar. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized.

Morningstar rankings are based on a fund’s average annual total return relative to all funds in the same Morningstar category. Fund performance used within the rankings, reflects certain fee waivers, without which, returns and Morningstar rankings would have been lower. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100.

Although information herein is believed to be reliable, FolioBeyond makes no representation or warranty as to its accuracy, and information and opinions reflected herein are subject to change at any time without notice. The past performance information presented herein is not a guarantee of future results.

Highlight: Risk-Return Frontier

The diversity in Fixed Income sector Exchange Traded Funds (“ETFs”) has led to the availability of many choices in constructing Fixed Income portfolios.  While broader index-based ETFs have generated respectable long-term returns, a large portion of their historical return attribution was derived from passive duration* risk exposure in a decades-long bull market in bonds. During this type of one-way move, investors have become complacent about taking duration risk and have relied too heavily on risk analysis based on historical returns. In order to properly assess risk-return trade-offs and analyze the various types of exposures and opportunities available in the Fixed Income market, advanced value and risk analysis can provide valuable insight.

We can compare the risk/return attributes of 23 subsector ETFs we utilize in our multi-factor approachversus  a more simplistic, historical return-based profile. FolioBeyond’s model approach measures forward-looking values that capture embedded options, default costs and other adjustments to enable an apples-to-apples comparison across sectors.  On the risk side of the equation, the adjusted risk measure captures various sources of risk ranging from duration, credit spreads, momentum effects, and current implied volatility levels.  In essence, the advanced analytics approach attempts to provide a comprehensive risk/return profile of each sector ETF. 

In contrast, the graph below shows a simplistic risk/return profile based on 2 years of historical returns and volatility.  This backward-looking approach can often overlook important nuances that may have a significant impact on both forward-looking risk and return dynamics.  A simple example would be TLH, a long duration Treasury ETF that shows a higher return estimate based on historical measures.  However, FolioBeyond’s forward-looking algorithmic model implies a much lower anticipated yield and value.  Another perspective is to look at the break-even rate increase.  Given that the 10-year Treasury is at a yield of 0.7%, it would only take a 0.08% increase in the 10-year Treasury yield before an investor would break-even on a total return basis over a 1-year holding period.  While the Fed may have more control over short-term rates, the longer maturities are much more tied to market forces including changing inflation expectations. 

In addition to the analysis detailed above, investors also need to incorporate correlation effects and other portfolio constraints (such as duration and credit exposure limits) when constructing Fixed Income portfolios. FolioBeyond’s algorithm used in FWDB’s strategy is designed to allow for investor-specific constraints in offering optimized portfolio solutions. Given this type of framework, investors will be reaching for the optimal point on the efficient frontier of the Fixed Income markets.

Source: Morningstar; Bloomberg. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart
the data, the higher the deviation.

Although information herein is believed to be reliable, FolioBeyond make no representation or warranty as to its accuracy, and information and opinions reflected herein are subject to change at any time without notice. The simulated risk and performance information presented herein is not a guarantee of future results.

* Duration is the change of a fixed income security that will result from a 1% change in interest rates, and is based on the yield to worst date.

Top Holdings

Ticker Security Description Portfolio Weight %
AGZ ISHARES AGENCY BOND ETF 30.74%
SHV ISHARES SHORT TREASURY BOND 30.03%
SJNK SPDR BBG BARC ST HIGH YIELD 21.24%
SHYG ISHARES 0-5 YR HY CORP BOND 8.67%
TLH ISHARES 10-20 YEAR TREASURY 4.72%
CMBS ISHARES CMBS ETF 3.10%
SHY ISHARES 1-3 YEAR TREASURY BO 1.55%

As of 8.31.2020. Cash is not included.

Respectfully,

Yung Lim
CEO of FolioBeyond
AdvisorShares FolioBeyond Smart Core Bond ETF (FWDB) Research Strategist

 

Past Commentary

 


Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. ETNs have a maturity date and generally, are backed only by the creditworthiness of the issuer. The value of an ETN may be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in the underlying market (e.g., the commodities market), changes in applicable interest rates, and changes in the issuer’s credit rating and economic, legal, political or geographic events that affect the market. Other Fund risks include market risk, equity risk, early closing risk, liquidity risk and trading risk. The Fund will be subject to the risks associated the Underlying ETFs’ or ETP’s investments such as commodity risk, concentration risk, credit risk, fixed income risk, high yield risk, income risk, interest rate risk, and investment risk.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. 

Holdings and allocations are subject to risks and change.

The views in this commentary are those of the portfolio manager and many not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.