MENV: 2nd 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/menv.

Performance

Bond market volatility remained at levels last seen during the height of COVID as the Fed ramped up its rhetoric in the battle against inflation. Increases in the Fed Funds Rate accelerated from the initial 25 basis point bump in March, rising 50 basis points in May and an additional ¾ point in June. The outlook for the yearend 2022 Funds rate stands at 3.45%, versus 0.82% on January 1st, having briefly topped 3.9% just a few weeks ago. An abrupt reversal lower in interest rates occurred in late June as the financial markets’ focus on inflation concerns were quickly supplanted by growing recession fears. The most recent reports on consumer and business sentiment and retail sales suggested inflation, rising interest rates and lower stock prices were a drag on spending in real terms. These signs of economic weakness exposed outsized bets on further declines in bond prices, fueling a short-covering bounce into quarter end. For the quarter, the MENV’s NAV fell 4.62% (NAV) and posted a 5.15% decline in market value. The benchmark Bloomberg Aggregate Index returned -4.69%. Year-to-date, the Fund returned -9.99% on a NAV basis, -10.44% in market value, versus -10.35% for the index.

The largest area of outperformance for the second quarter was the portfolio’s nearly 10% underweight allocation to agency mortgages, which added 9 basis points in relative returns from 98 basis point sector underperformance versus Treasuries. The portfolio will continue to be underweight the mortgage sector to fund an overweight to callable agencies.

The largest detractor of performance came from the portfolio’s 8% overweight to the corporate sector which subtracted 18 basis points in relative performance. The average credit spread for the index widened by 39 basis points to end the quarter at +155, underperforming duration matched treasuries by 228 basis points. The portfolio was flat in corporate security selection on the quarter. The roughly 32% allocation to credit consisted of a 3% underweight in BBB-rated credit, which underperformed A-rated credit by 118 basis points and an underweight to long credit which underperformed intermediate credit by 133 basis points. On a relative basis, the portfolio’s overweight allocation to the corporate sector was mostly unchanged during the quarter but was opportunistic in taking advantage of swapping out of outperforming issues and into underperformers in the secondary market.

The overweight in callable agencies and step-up bonds, as part of the security selection process, was a net drag on performance in the second quarter. Heightened volatility and a temporary supply/demand imbalance on these securities widened the option-adjusted spread for callable agency debt to their widest levels since the Global Financial Crisis, resulting in 6 basis points of underperformance versus the agency sector. We will continue to look to add to these securities (where prudent) on weakness as we continue to believe they offer the best risk/reward available in the investment grade universe.

Top Holdings

Security Description Price $ Portfolio Weight %
FEDERAL HOME LOAN BANK STEP-CPN 4/29/2027        99.55 2.99%
FEDERAL FARM CREDIT BANK 3.36 2/23/2037        92.14 2.54%
FEDERAL HOME LOAN BANK 2 2/25/2027        94.45 2.12%
US TREASURY N/B 2 11/15/2041        79.91 2.11%
FEDERAL FARM CREDIT BANK 2.87 2/25/2030        94.03 2.03%
FN MA4025 2.5 5/1/2050        88.97 1.96%
FR QD1253 2 11/1/2051        87.42 1.63%
FN FM9419 3 10/1/2051        93.52 1.58%
FR ZS9065 4 6/1/2033      101.74 1.55%
APPLE INC 4.65 2/23/2046      103.73 1.52%

As of 06.30.2022. Cash is excluded.

Outlook

For the second half of the year, we envision continued market volatility as the Fed attempts to successfully implement a “soft landing” by gradually slowing economic activity to quell inflation.  We expect to maintain the portfolio’s significant overweight to the agency sector, which offers the most attractive risk-reward profile of any fixed income sector.  Risks to the credit sector are balanced, although the recent widening of credit spreads to +160 over comparable treasuries is increasing the appeal of the sector.  The expected continuation of volatility will no doubt produce further opportunities over the next few months, and we are positioned to actively take advantage of attractive situations as they arise.

Respectfully,

CS McKee
AdvisorShares North Square McKee ESG Core Bond ETF (MENV) Portfolio Manager

Past Commentary

On November 1, 2021, the AdvisorShares FolioBeyond Smart Core Bond ETF’s (FWDB) was renamed to the AdvisorShares North Square McKee ESG Core Bond ETF (MENV) and its objective and strategies and manager changed. The primary changes to the Fund’s principal investment strategies were that (1) the Fund will no longer be a fund of funds, but instead will invest in fixed income securities directly, and (2) the Fund’s portfolio is now managed with a view to environmental, social, and corporate governance (ESG) factors. (3) The fund is now sub-advised by CS Mckee
Advisors.

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.
  • Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

 


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.