FWDB: July 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.
FolioBeyond’s algorithm underlying the AdvisorShares FolioBeyond Smart Core Bond ETF (FWDB) returned +1.26% in July versus +1.49% for the Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”). FWDB’s returns in July were primarily driven by short duration High Yield Corporate bond exposure, followed by Government Agency and long duration Treasury bond exposure. In contrast, AGG’s returns came primarily from Investment Grade Corporate bonds, MBS, and Treasuries across the yield curve. The Morningstar Multisector category performance can likely be attributed to High Yield and High-Grade credit exposure. As we discuss below, understanding return attribution, a
PERFORMANCE SUMMARY AS OF JULY 31, 2020
|1-Month Return||YTD 2020 Return||1-Yr Return||3-Yr Return||5-Yr Return|
U.S. Aggregate Bond Index (“AGG”)
|Morningstar Multisector Bond Category||2.35%||0.26%||2.60%||3.14%||3.83%|
|FWDB’s Morningstar Category Percentile Rank||—||—||49||46||43|
|# of Funds in Morningstar Multisector Bond Category||366||350||338||295||250|
U.S. Aggregate Bond Index (“AGG”)
|Morningstar Multisector Bond Category||—||—||11.85||7.52||6.16|
U.S. Aggregate Bond Index (“AGG”)
|Morningstar Multisector Bond Category||—||—||0.32||0.30||0.49|
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.
Standard Deviation measures the dispersion of a set of data from its mean and is calculated as the square root of variance. Sharpe Ratio
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: Sharpe Ratio and Correlation
Investors often focus on top line return numbers and pay less attention to return attribution, portfolio risk dimensions, and correlation effects. Return attribution is important in understanding not only sources of past returns but also for anticipating risk/ return dynamics under various scenarios. AGG has benefited greatly this year from its static duration and Investment Grade Corporate and Agency MBS exposures. While these attributes have benefited from the tailwinds of Fed support and the flight to quality-driven bond market rally, these characteristics are less likely to be large contributors of return going forward, especially given the current absolute low levels of interest rates and narrow credit spreads. If interest rates were to rise modestly, even by 50 basis points, the value for an index like the AGG is highly exposed and could decline by roughly 3.3%, all else being equal. We can argue that in that type of scenario, FWDB’s algorithmic multi-factor portfolio optimization process will help maintain a lower duration profile while maintaining exposure to cheaper credit sectors.
Secondly, return volatility can often be overlooked as long as actualt returns appear attractive. A comparison of the 1-year returns above for FWDB and the Morningstar Multisector Bond Category average shows the significant differences in risk relative to actual returns. While the 1-year return numbers are comparable, the Morningstar Multisector Bond Category average exhibits two times the volatility of FWDB, as measured by standard deviation. FWDB has also had a superior Sharpe ratio in comparison to the Morningstar Multisector Bond Category average during this time period.
The third category of risk analysis that is often unaccounted for relates to correlation effects. It is important for portfolio allocations to benefit from correlation and diversification effects and thereby improve aggregated risk-adjusted returns. Diversification makes it possible for investors to benefit from an aggregate portfolio that is better, i.e. less risky, than the sum of the parts. If an RIA combines funds or ETFs where the underlying strategies are similar, e.g. two or three different indices which underlie funds like AGG and the Vanguard Total Bond Market Index Fund (“BND”), the correlation numbers are likely to be high and therefore have minimal portfolio benefits. The table below shows correlations among FWDB, the indices for AGG and BND, and the Morningstar Core Plus and Multisector category averages. The lower correlations for SNFBFI are not surprising given the algorithmic optimization process of SNFBFI in comparison to the more static exposures of AGG or BND and the general consistently high credit exposures of less dynamic Multisector funds.
(as of July 31, 2020)
|FWDB||Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”)||Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index||US Fund Intermediate Core-Plus Bond Category||US Fund Multisector Bond Category|
|Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”)||0.53||1.00||–||–||–|
|Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index||0.53||1.00||1.00||–||–|
|US Fund Intermediate Core-Plus Bond Category||0.77||0.85||0.89||1.00||–|
|US Fund Multisector Bond Category||0.81||0.37||0.38||0.79||1.00|
Source: Morningstar. Correlation is a statistic that measures the degree to which two variables move in relation to each other.
|Ticker||Security Description||Portfolio Weight %|
|AGZ||ISHARES AGENCY BOND ETF||30.77%|
|SHV||ISHARES SHORT TREASURY BOND||29.93%|
|SJNK||SPDR BBG BARC ST HIGH YIELD||21.16%|
|SHY||ISHARES 1-3 YEAR TREASURY BO||7.83%|
|SHYG||ISHARES 0-5 YR HY CORP BOND||5.46%|
|TLH||ISHARES 10-20 YEAR TREASURY||4.91%|
As of 7.31.2020. Cash is not included.
CEO of FolioBeyond
AdvisorShares FolioBeyond Smart Core Bond ETF (FWDB) Research Strategist