FLRT

AdvisorShares Pacific Asset Enhanced Floating Rate ETF

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 month end performance, please click www.advisorshares.com/fund/flrt.

June 2018 Portfolio Manager Review


FUND PERFORMANCE

In June, the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned -0.01% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of -0.01%.

MARKET REVIEW

In June the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) was flat returning 0.00%. The loan asset class remains in favor given its insulation to broader market volatility and a strong fundamental outlook. The asset class continues to receive support via higher rates, as demonstrated by an 3-month LIBOR rate which at month end at 2.34%. Strong technicals and a low correlation factor relative to the investment grade bond market led loans to outperform investment grade bonds, but not high yield bonds during June. The Bloomberg Barclays US Aggregate Index and the Bloomberg Barclays US Corporate High Yield Index returned -0.12% and 0.40%, respectively. In a continued theme, lower credit quality loans outperformed higher-quality credits with BB-rated credits returning 0.02%, B-rated credits returning 0.14%, and CCC-rated credits returning 0.77%. According to JP Morgan, institutional gross new loan volume totaled $88.5 billion (bn) in June ($45bn net). The repricing volume of approximately $24bn represented the lowest monthly total since January. On a year-to-date basis, net issuance is approximately $166.9bn (excluding refinancing/re-pricings) and gross issuance is roughly $501bn. Net new issuance continues to tread ahead of 2017’s post crisis highs. According to Thomson Reuters, new issue CLO activity increased to $13.6bn in June and is at $66.7bn year to date. Volume remains robust and is approximately 27% of the levels experienced in 2017. According to the most recently available data, loan flows recorded $1.4bn of inflows in June, and roughly $12bn thus far in 2018. Conversely, high yield funds recorded and outflow in June of nearly $3.5bn, adding to the year to date outflow amounting to nearly $24bn. The strong results of 1Q18 corporate earnings, robust 2Q18 corporate earnings expectations, the positive waterfall effect of tax reform, and consumer sentiment look to paint a favorable economic picture for the second half of 2018.

PORTFOLIO REVIEW

The market continues to balance quite healthy underlying credit conditions coupled with relatively low yields, as compared to historical averages. Economic growth continues to be positive, monetary policy remains accommodative (although gradually less so), and overall leverage among high-yield companies remains, for the most part, reasonable. With volatility finally making a return to the equity markets, high-yield spreads have retreated from very tight levels earlier in the year, and market opportunities have modestly improved. For the first time in many years, investors are receiving reasonable yields for holding shorter-maturity high-yield bonds. The key driver here is the increase in the London Interbank Offered Rate (LIBOR) as well as other short-term rates, driven by Fed rate hikes. This is an opportunity we are looking to take advantage of. While the high-yield market still trades at relatively tight levels on a historic basis, upside potential has returned. However, there remains no lack of potentially negative market drivers, including increasing inflation driving interest rates higher, a lack of workers negatively impacting corporate margins, geopolitical risks, and overall volatility from Washington D.C., to mention a few. During June, the portfolio’s allocation to fixed rate bonds coupled with positive security selection within loans were accretive to monthly performance. Balancing risks in the portfolio remains important in looking ahead and we continue to believe flexibility and liquidity are critical at this juncture.

 

Respectfully,

Bob Boyd,

Managing Director, Pacific Asset Management Portfolio Manager of FLRT


May 2018 Commentary

 

Top 10 Holdings:

Portfolio Holdings Portfolio Weight (%)
Chesapeake Energy Corporation 1.79
Caesars Resort Collection, LLC 1.69
Uber Technologies, Inc. 1.69
Nexeo Solutions LLC 1.68
DTZ U.S. Borrower, LLC 1.68
ProAmpac PG Borrower LLC 1.68
Vistra Operations Company LLC 1.67
Quikrete Holdings, Inc 1.67
Spin Holdco Inc 1.66
ClubCorp Holdings, Inc. 1.65

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus which can be obtained by visiting www.advisorshares.com. Please read the prospectus and summary 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. Investing in derivatives may be riskier than other types of investments because they are more sensitive to change in economic or marketing conditions that could result in losses that significantly exceed the Fund’s original investment. The Fund primarily invests in floating rate loans and floating rate debt securities. The market for floating rate loans may be subject to irregular trading activity, wide bid/ask spreads, and extended trade settlement periods. The floating rate feature of loans means that floating rate loans will not generally experience capital appreciation in a declining interest rate environment. Declines in interest rates may also increase prepayments of debt obligations and require the Fund to invest assets at lower yields. Other Fund risks include market risk, leverage risk, foreign investment risk, liquidity risk, income and interest rate risk, liquidity risk, management risk, high yield securities risk, loan participation risk, prepayment risk, and trading risk. Please see the prospectus for details regarding 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 to change.

The credit ratings referenced in this commentary are published rankings by Moody’s and are 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. 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.

Definitions:

A basis point (bps) is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument.
A collateralized loan obligation (CLO) is a security backed by a pool of debt, often low-rated corporate loans.

Downside risk is the likelihood that a security will decline in price, or the amount of loss that could result from that potential decline. Liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Leverage is the amount of debt used to finance a firm’s assets.
The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments. One cannot invest directly in an index.
The Bloomberg Barclays Capital Aggregate Bond Index measures the performance of the U.S. investment grade bond market. One cannot invest directly in an index.