HOLD: 1st Quarter 2022 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/hold.

Performance

AdvisorShares North Square McKee Core Reserves ETF (symbol: HOLD) returned -0.57% in the first quarter of 2022, lagging the 4-basis point return of the Treasury 3-month bill and narrowly outperforming the -0.62% return of the 12-month T-bill.  Market interest rates rose precipitously as expectations for the Federal Funds rate at the end of this year tripled from approximately 80 basis points at the beginning of the quarter to 2.40% on March 31st.

Driven by a continued rise in inflation, the rapid escalation of market interest rates and volatility were clearly the most prominent factors impacting performance in the first three months of the year.  Hawkish commentary from the Federal Reserve contributed to a significant flattening of the yield curve.  Market losses accelerated in March as war in Ukraine fueled further commodity price inflation.

The MOVE index, a measure of market volatility and indicative of the change in callable agency spreads, returned to levels not seen since the onset of COVID in early 2020.  By comparison, corporate yield spreads widened 20 basis points or less than 10% of the peak to trough range over the past two years.

With all spread sector yield spreads widening significantly during the quarter, the shortest average life securities in these sectors were the best performing holdings in the portfolio.  Securities out to approximately five months average life, measured at the beginning of the quarter, offered sufficient yield to offset price loss due to the rise in market interest rates.  Mortgage securities were a drag on performance, as yield spreads widened and duration extended in response to the elevated inflation outlook and increasingly hawkish comments from the Fed.  Lower rated credit also lagged higher rated counterparts.  Average credit quality as maintained at Aa3.

In response to the move in market interest rates, the average maturity of the portfolio was allowed to contract during the quarter to minimize price erosion.

 

Top Holdings

Security Description Price $ Portfolio Weight %
US TREASURY N/B 1.875 4/30/2022      100.13 5.87%
WELLS FARGO & COMPANY 3.45 2/13/2023      101.16 3.08%
US TREASURY N/B 0.125 6/30/2022        99.89 3.03%
CRED SUIS GP FUN LTD 3.8 9/15/2022      101.05 2.89%
BANK OF AMERICA CORP 3.004 12/20/2023      100.32 2.73%
MORGAN STANLEY 4.875 11/1/2022      101.73 2.55%
US TREASURY N/B 0.125 3/31/2023        98.47 2.55%
AMERICAN EXPRESS CO FRN 5/20/2022      100.02 2.30%
ATHENE GLOBAL FUNDING FRN 1/7/2025        98.44 2.21%
JP MORGAN USD GOVT MONEY MARKET INSTL           1.00 2.20%

As of 03.31.2022. Cash is excluded.

Outlook

Excessive fiscal and monetary policy support, supply and labor shortages, and the onset of war in Ukraine combined to drive inflation well above expected and acceptable levels, spurring progressively more strident commentary from members of the FOMC.  With short-term market interest rates now discounting a more aggressive central bank response, especially in the May and June meetings, we expect to see market volatility level off in the second quarter before receding in the summer months.  Market interest rates should continue to move higher, though not at the breakneck speed witnessed in the first quarter.  Financial conditions should continue to tighten, due to higher Treasury and mortgage rates, modestly wider credit spreads, and lower equity prices.  This will slow the demand side of the economy while the supply side continues to cure.  The Fed hopes to engineer a growth recession, maintaining modestly positive gains in economic output, while reining in inflation.  From the current year-over-year reading of nearly 8%, consumer price inflation is expected to recede to 4.5% by yearend and 2.5% in 2023.

From a relative value standpoint, asset backed securities and agency CMOs remain our top choices in this environment.  Asset-backed holdings now represent 40.3% of portfolio market value, up from 32.6% at the beginning of the year.  Agency CMOs are also attractive as wider spreads significantly increase the likelihood of outperforming equal duration Treasuries going forward.  Finally, portfolio duration will remain within shouting distance of 0.50 years as we await further interest rate activity and commentary from the Fed as well as some confirmation that the peak in inflation has come to pass.

Respectfully,

CS McKee
AdvisorShares North Square McKee Core Reserves ETF (HOLD) Portfolio Manager

On November 1, 2021, the AdvisorShares Sage Core Reserves ETF (the “Predecessor Fund”) was renamed the AdvisorShares North Square McKee Core Reserves ETF. On that same day, CS McKee Advisors took over management of the fund from Sage Advisory.

 

DEFINITIONS:

  • basis point is one hundredth of a percentage point (0.01%).
  • A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

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.

Fixed Income Securities Risk. The market value of fixed income investments in which the Fund may invest may change in response to interest rate changes and other factors. During periods of falling interest rates, the value of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the value of fixed income securities generally decline. Mortgage-Backed and Asset-Backed Securities Risk. The Fund could lose money if the issuer or guarantor of a debt instrument in which the Fund invests becomes unwilling or unable to make timely principal and/or interest payments, or to otherwise meet its obligations.

The impairment of the value of collateral underlying a mortgage-backed or asset-backed security (for example, due to non-payment of loans) may result in a reduction in the value of such security. In addition, early payoffs in the loans may result in the Fund receiving less income than originally anticipated.

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 to change.

The views in this material were those of the Portfolio Manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.