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.
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|
U.S. Aggregate Bond Index (“AGG”)
|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|
|Morningstar Multisector Bond Avg.
|Morningstar Multisector Bond Avg.
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.
|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.