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.

Commentary

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
FWDB (NAV) 1.26% -0.10% 3.16% 3.46% 4.16%
Bloomberg Barclays
U.S. Aggregate Bond Index (“AGG”)
1.49% 7.72% 10.12% 5.69% 4.47%
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
STANDARD DEVIATION          
FWDB 5.84 4.32 4.10
Bloomberg Barclays
U.S. Aggregate Bond Index (“AGG”)
3.69 3.33 3.12
Morningstar Multisector Bond Category 11.85 7.52 6.16
SHARPE RATIO          
FWDB 0.38 0.43 0.73
Bloomberg Barclays
U.S. Aggregate Bond Index (“AGG”)
2.35 1.19 1.05
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
measures the average return minus the risk-free return divided by the standard deviation of return on an investment. 

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.

CORRELATION

(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
FWDB 1.00
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.

Top Holdings

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.

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.