Are you sure you want to change languages?
The page you are visiting uses a different locale than your saved profile. Do you want to change your locale?
SPDR® SSGA Fixed Income Sector Rotation ETF – Q4 2020 Commentary
During the fourth quarter of 2020, FISR finished up in absolute returns and outperformed the Bloomberg Barclays US Aggregate Bond Index. The fund finished the quarter with overweights to long-term corporate bonds, mortgage-backed securities (MBS) and high-yield bonds.
Performance
Fixed income sector positioning was advantageous. Despite soaring COVID-19 cases, markets appeared to look through near-term headwinds and towards renormalization in 2021. This optimism lifted credit bonds with both high yield and investment-grade credit meaningfully outperforming the US Aggregate Bond Index. Targeted allocations to both intermediate and long-term investment-grade bonds were the biggest positive contributors. Our high yield allocation at the beginning of October also aided performance. Elsewhere, allocations to intermediate Treasuries and MBS weighed on relative performance. As credit bonds advanced, the US Treasury curve steepened and 10-year yields moved up 24 bps, leading to underperformance from our targeted allocation.
Portfolio Positioning and Outlook
Not dissimilar to the diametrically opposed forces influencing the course of risk assets, fixed income has its own set of counterbalancing measures. A slight delay in publication has afforded us a window into the results of the Georgia run-off Senate elections in the United States — and the fuse that was lit underneath the level of interest rates as a result. The potential for increased stimulus and even larger fiscal deficits seems to have awoken investors to the risks of lending at fixed interest rates over longer horizons. Even without the political dynamics, our modeling for US markets was pointing towards higher interest rates as a result of anticipated mean reversion in currently low inflation figures alongside advancing Purchasing Managers’ Index (PMI) data.
Credit assets continue to look attractive, though it is not lost on us that some of our prior operating assumptions surrounding the asset class are no longer as relevant. Coming out of the crisis period earlier in 2020, credit returns were buoyed by a wide array of factors including remunerative yields, the Federal Reserve’s special purpose vehicles and improved liquidity conditions, as well as our own shorter-term quantitative models. Investment grade credit no longer provides above-average return compensation as yield levels have already retreated to pre-pandemic levels. The support from the Federal Reserve has also eroded to some degree, as the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) expired as of the end of 2020.
However, should there be a need to support these markets in the future, it seems likely to us that incoming Treasury Secretary Janet Yellen would be quick to reauthorize programs such as these. More constructively, liquidity conditions remain stable and our modeling continues to prefer credit — particularly longer-term corporates, as some carry advantage remains, the yield curve is already relatively steep and we’re in the midst of a more beneficial seasonal period for credit. While longer-term corporates are also more subject to interest rate risk, should the move in rates become more dramatic, it seems likely that the Federal Reserve would step back in to arrest the advance.
Source: FactSet, as of December 31, 2020. Past performance is not a reliable indicator of future performance.
Bloomberg Barclays US Aggregate Bond Index
A benchmark of the performance of the US dollar denominated investment grade bond market, which includes investment grade government bonds, investment grade corporate bonds, mortgage pass through securities, commercial mortgage backed securities and asset backed securities that are publicly for sale in the US.
Mortgage-Backed Securities (MBS)
Pooled securities that are backed by mortgage loans. Agency mortgage backed securities refer to securities backed by pools of mortgages issued by US government-sponsored enterprises such as Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Overweight
The weighting of a given security, industry or market sector that exceeds the weighting assigned that security, industry or sector in a relevant benchmark or benchmark portfolio.
Underweight
The weighting of a given security, industry or market sector that is less than the weighting assigned that security, industry or sector in a relevant benchmark or benchmark portfolio.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Investing involves risk including the risk of loss of principal.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs’
net asset value. Brokerage commissions and ETF expenses will reduce returns.
Actively managed ETFs do not seek to replicate the performance of a specified index. Because the SPDR SSGA Active Asset Allocation ETFs are actively managed, they are therefore subject to the risk that the investments selected by State Street Global Advisors may cause the ETFs to underperform relative to their benchmarks or other funds with similar investment objectives.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Asset allocation is a method of diversification which positions assets among major investment categories. Asset allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
Foreign (non-US) securities may be subject to greater political, economic, environmental, credit and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
Investments in asset-backed and mortgage-backed securities are subject to prepayment risk which can limit the potential for gain during a declining interest rate environment and increases the potential for loss in a rising interest rate environment.
Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
Intellectual property information: The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or
timeliness of the data and have no liability for damages of any kind relating to the use of such data.
BLOOMBERG®, a trademark and service mark of Bloomberg Finance L.P. and its affiliates, and BARCLAYS®, a trademark and service mark of Barclays Bank Plc, have each been licensed for use in connection with the listing and trading of the SPDR Bloomberg Barclays ETFs.