FWDB: 3rd Quarter 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 -0.09% in September versus -0.05% for the Bloomberg Barclays U.S. Aggregate Bond Index (“AGG”). Treasury rates were range bound during the month with the 10-year Treasury yield declining by 3 basis points (from 0.72% to 0.69%) while the 2-year Treasury dropped by only 1 basis point (from 0.12% to 0.13%).  FWDB’s returns in September had marginal positive contributions from CMBS offset by small losses on short High Yield Corporate and Agency exposures.

PERFORMANCE SUMMARY AS OF September31, 2020

Total Return 1-Month YTD 2020 1-Year 3-Year 5-Year
FWDB (NAV) -0.09% -0.43% 1.85% 3.194% 4.32%
Bloomberg Barclays
U.S. Aggregate Bond Index (“AGG”)
-0.05% 6.79% 6.98% 5.24% 4.18%
Morningstar Multisector Bond Category -0.30% 0.77% 2.18% 3.09% 4.34%
FWDB’s Morningstar Category Percentile Rank 65 53 53
# of Funds in Morningstar Multisector Bond Category 362 339 330 292 248
Standard Deviation     1-Year 3-Year 5-Year
FWDB 5.72% 4.33% 4.07%
Morningstar Multisector Bond Avg.
11.86% 7.48% 6.07%
AGG 3.33% 3.37% 3.15%
Sharpe Ratio     1-Year 3-Year 5-Year
FWDB  0.22 0.37 0.78
Morningstar Multisector Bond Avg.
0.30 0.29 0.57
AGG 1.83 1.07 0.95

Source: BNY Mellon, Morningstar..

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.

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: High Yield Corporate Sector Rotation Strategy

FWDB’s strategy utilizes FolioBeyond’s multi-factor modeling which can be customized for various Fixed Income market applications. Given the availability of proper analytical measures, the simulation can be set up to optimize portfolio allocations across a user defined universe of investment choices along with desired risk/return targets.

We illustrate this using an example with the High Yield Corporate Bond (“High Yield”) market. The High Yield market is characterized by a diversity of industries comprising 17 major sectors as defined by Bloomberg. While correlations across these 17 industry sectors may be high in certain scenarios, the relative performance across multiple industries will vary depending on a variety of factors including defaults, recovery rates, relative value and other industry specific factors. In the aftermath of the Covid-induced dislocation, there continues to be several dynamic factors influencing the value and risk of individual industries. Consequently, sector rotation strategies have the potential to add value and relative performance. A consistent and objective rules-based process can help manage a rigorous methodology for implementing a disciplined sector rotation strategy.

To this end, we may demonstrate the customization of the FolioBeyond multi-factor model used in FWDB’s strategy to optimize across 17 industry sectors in the High Yield market in a historical hypothetical example. The major components of the hypothetical included the following:

  • Daily update of yields and probability of default assumptions for each industry sector
  • Application of industry-specific long-term recovery rates
  • Maximum return volatility set to the 1-year rolling historical volatility of the High Yield market (represented by the iShares iBoxx $ High Yield Corporate Bond ETF (“HYG”)
  • Maximum exposure of 20% per industry sector
  • Hypothetical time frame: Nov. 1, 2012 – Sep. 16, 2020

The historical hypothetical shows that this type of sector rotation strategy outperformed the overall High Yield Index (Markit iBoxx Liquid High Yield TR USD) by 75 basis points (0.75%) annually during the past 9.9 years (this time period was limited by availability of historical analytical measures).  Relative to the HYG ETF, the outperformance was greater at 124 basis points (1.24%) annually.  Additionally, the volatility of FolioBeyond’s sector rotation strategy was lower than both the overall index and ETF, leading to a significantly better Sharpe Ratio.

This illustration demonstrates the merits of an advanced multi-factor model that captures the major components of value and risk including forward looking relative value, historical and future implied volatility levels, momentum effects and correlations.  Please contact us to explore how our advanced, portfolio optimization solutions can be used to meet your investment goals.  

Top Holdings

Ticker Security Description Portfolio Weight %
AGZ ISHARES AGENCY BOND ETF 30.78%
SHV ISHARES SHORT TREASURY BOND 30.09%
SJNK SPDR BBG BARC ST HIGH YIELD 21.13%
SHYG ISHARES 0-5 YR HY CORP BOND 8.60%
TLH ISHARES 10-20 YEAR TREASURY 4.78%
CMBS ISHARES CMBS ETF 3.14%
SHY ISHARES 1-3 YEAR TREASURY BO 1.56%

As of 9.30.2020. 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.