FWDB: June 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 -0.025% in June versus +0.63% for the Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”). Over longer time periods, FWDB continues to outperform Morningstar’s US Fund Multisector Bond category as shown in the table below.

Risk levels in the option markets continue to ratchet down with continued Federal Reserve intervention and slow renormalization of the economy. Consequently, the FWDB has gradually increased risk in short duration High Yield Credit and rate duration primarily in US Agency bonds.

PERFORMANCE SUMMARY AS OF JUNE 30, 2020

  1-Month Return YTD 2020 Return 1-Yr Return 3-Yr Return 5-Yr Return
FWDB (NAV) -0.02% -1.35% 2.73% 3.35% 4.01%
Bloomberg Barclays
U.S. Aggregate Bond Index (“AGG”)
0.63% 6.14% 8.74% 5.32% 4.30%
Morningstar Multisector Bond Category Average 1.64% -2.04% 0.69% 2.63% 3.30%
FWDB’s Morningstar Category Percentile Rank 33 33 28
# of Funds in Morningstar Multisector Bond Category 352 336 321 283 235

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.

The primary driver of returns in June was long duration Treasuries and short duration High Yield Corporate Bonds, offset by Agency and short Treasury exposures. The markets are likely to continue to respond to any significant changes related to the Coronavirus in conjunction with the pace of the reopening of the economy supplemented with any new government/Fed stimulus actions. 

Highlight: Sector Model Volatility Measures

Effective portfolio optimization involves a comprehensive approach for properly capturing constantly changing sector volatility levels.  FWDB’s underlying algorithm quantifies the volatility of each fixed income sector ETF before they are included in the FolioBeyond’s overall optimization framework that incorporates correlation effects and applies various model constraints.  

In order to demonstrate the changing risk dynamics experienced in recent months, we provide a high-level view of recent trends of our model volatility measures for representative sectors across the spectrum of ETFs in our investible universe. The volatility measures we show in the graph below represent the overall risk measure of each ETF quantified independently (before correlation effects are considered). These risk measures incorporate both historical and current implied volatility levels as well as momentum effects. The graph below shows that while certain sectors like long-term Treasuries (TLH) and Investment Grade Corporates (LQD) have come back closer to pre-March risk levels, many sectors are still exhibiting elevated risk levels, especially at the higher end of the risk spectrum, as shown for High Yield Municipals (HYD) and Agency Mortgage REITs (REM). Given the risk levels of the various fixed income sectors, FWDB’s model would require additional reductions in volatility levels to enable a full risk allocation to the higher risk sectors, as it did for a large part of 2019. This overall result is consistent with many fixed income investors’ qualitative views of the current state of the fixed income markets – specifically that valuations may have gotten ahead of the fundamental risks still facing the economy.

SHY – iShares 1-3 Year Treasury Bond ETF; TLH – iShares 10-20 Year Treasury Bond ETF; LQD –iShares iBoxx $ Investment Grade Corporate Bond ETF; SJNK – SPDR Bloomberg Barclays Short Term High Yield Bond ETF; HYG – iShares iBoxx $ High Yield Corporate Bond ETF; HYD – VanEck Vectors High-Yield Municipal Index ETF; REM – iShares Mortgage Real Estate Capped ETF.

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

Model portfolios need to utilize a consistent approach for properly measuring the multi-dimensional aspects of fixed income risk to deliver superior risk-adjusted returns over time.  We believe FolioBeyond’s advanced algorithm used in FWDB allows investors to maintain their desired target portfolio risk levels while optimizing the allocations to maximize returns within this context.

Top Holdings

Ticker Security Description Portfolio Weight %
SHV ISHARES SHORT TREASURY BOND 30.27%
AGZ ISHARES AGENCY BOND ETF 27.61%
SJNK SPDR BBG BARC ST HIGH YIELD 17.67%
SHY ISHARES 1-3 YEAR TREASURY BO 12.64%
SHYG ISHARES 0-5 YR HY CORP BOND 8.46%
TLH ISHARES 10-20 YEAR TREASURY 3.04%

As of 05.31.2020. 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.