HOLD: 3rd Quarter 2020 Portfolio Manager 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

During the quarter ending September 30th, the AdvisorShares Core Reserves (NYSE Arca: HOLD) returned 0.63% vs 0.03% on the 1-3 Month T-bill Index. HOLD paid out income of 7.39 cents per share, for a Bloomberg indicated yield of 0.90%. The Bloomberg Barclays US Corporate 1-3 Year Average OAS was 0.15% tighter on the quarter, ending at 0.58%.

Attribution

Within the corporate sector, Industrials had the best performance during the quarter, returning 1.05%. This sector represents roughly 33% of the overall fund. Some of the better performing positions include the QVC 2023’s, Occidental Petroleum 2021’s, and the Delta Airlines 2020’s, which returned 4.75%, 2.66%, and 2.36%. These were some of the more volatile names affected from the Covid-19 pandemic, and these returns reflect the spread tightening resulting from an improving economic outlook.

Financials, which represent 22% of the fund, returned 0.58% during the same time-period. The top two performers were the Aviation Capital Group 2021’s, and Air lease 2022’s which returned 3.42%, 2.71%. These air lessors have benefited from air traffic increasing off the lows. Among the poorer performing positions within the sector were the Capital One 2022’s, and the Wells Fargo 2023’s, which returned -0.05% and -0.06%.

Asset-backed securities followed the risk-on trend during the quarter, returning 28 basis-points. A significant portion of the asset-class is rated AAA, and the last 7 months have offered an opportunity to see how well it behaves during a significant economic downturn. ABS appears to have weathered the storm, with the underlying collateral performing well in most cases, and investors driving spreads below pre-pandemic levels.

Portfolio Activity

During the third quarter of 2020 there were 4 creation units, with the market value of the fund now being $111 million. HOLD had $9.860 million in maturities and structured product paydowns. This represents a turnover of nearly 9%, based on quarter-end fund values.

Top Holdings

Security Description Price $ Portfolio Weight %
US TREASURY N/B 1.125 2/28/2021 100.43 5.09%
US TREASURY N/B 1.25 3/31/2021 100.58 5.09%
US TREASURY FRN FRN 4/30/2022 100.11 4.91%
US TREASURY N/B 1.375 4/30/2021 100.74 3.39%
BANK OF AMERICA CORP 3.499 5/17/2022 101.89 2.58%
EDISON INTERNATIONAL 2.4 9/15/2022 102.01 2.22%
AMXCA 2017-6 A 2.04 5/15/2023 100.07 2.03%
CCCIT 2018-A1 A1 2.49 1/20/2023 100.69 1.98%
GOLDMAN SACHS GROUP INC 2.6 12/27/2020 100.52 1.93%
VZOT 2019-A A1A 2.93 9/20/2023 102.51 1.82%

As of 9.30.2020. Excludes cash and money markets.

Portfolio Characteristics Yield-to-Worst Coupon Maturity (Yrs) Effective Duration
as of 9.30.2020 0.420 2.689 1.280 0.680

 

Source: Sage Advisory Services; All data as of 9.30.2020.Credit quality ratings are primarily sourced from Moody’s but in the event that Moody’s has not assigned a rating the Fund will use Standard & Poor’s (the “S&P”). If these ratings are in conflict the most conservative rating will be used. If none of the major rating agencies have assigned a rating the Fund will assign a rating of NR (non-rated security). The ratings represent their (Moody’s and S &P) opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is Aaa, and the lowest is D. Securities with credit ratings of Bbb and above are considered investment grade.

Recent Headlines / Looking Ahead

During the third quarter the economic recover sustained its progress as Covid-19 cases continued to decrease in much of the country. The markets reflected this, with corporate spreads 15 basis-points tighter and the S&P 500 up over 8%. While there is certainly concern regarding a resurgence of the virus as the winter months approach, the consensus is that the worst is behind us.

There are a couple of items worth noting as we head into the fourth quarter. As was noted in the last commentary, the Treasury curve has begun to steepen, and this trend has continued into the first two week of the quarter. With inflation expectations increasing and significant government spending continuing, increasing rates seem likely. However, this is not to suggest that rates will jump hundreds of basis-points in the near-term. Rates will likely remain very low, especially at the front-end of the curve. However, the curve may continue to steepen slightly throughout the quarter.

Respectfully,

Sage Advisory Services
AdvisorShares Sage Core Reserves ETF (HOLD) Portfolio Manager

 

Past Commentary

DEFINITIONS:

  • basis point is one hundredth of a percentage point (0.01%).
  • Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semi-annually.
  • Credit spread is the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
  • Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
  • The Fed Funds rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. The rate may vary from depository institution to depository institution and from day to day.
  • London Interbank Offered Rate (LIBOR) is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.
  • The option adjusted spread (OAS) is a measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. Typically, an analyst would use the Treasury securities yield for the risk-free rate. The spread is added to the fixed-income security price to make the risk-free bond price the same as the bond.
  • Spread is the difference between the bid and the ask price of a security or asset.
  • 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.
  • Yield-to-worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. The yield to worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call or sinking fund, are used by the issuer. This metric is used to evaluate the worst-case scenario for yield to help investors manage risks and ensure that specific income requirements will still be met even in the worst scenarios.

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. Diversification and sector asset allocation do not guarantee a profit, nor do they eliminate the risk of loss of principal. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The Fund’s investment in fixed income securities will change in value in response to interest rate changes and other factors, such as the perception of the issuer’s creditworthiness. Fixed income securities with longer maturities are subject to greater price shifts as a result of interest rate changes than fixed income securities with shorter maturities. The Fund’s investments in high-yield securities or “junk bonds” are subject to a greater risk of loss of income and principal than higher grade debt securities. In addition the Fund is subject to leveraging risk which tends to exaggerate the effect of any increase or decrease in the value of the portfolio securities. The Fund is also subject to liquidity risk, issuer risk, foreign currency and investment risk, prepayment risk and trading risk. See prospectus for details regarding specific risks.

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.