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SPDR® Blackstone High Income ETF (HYBL) – Q4 2023 Commentary

High yield and loans experienced positive returns in the fourth quarter of 2023. HYBL returned 5.30%, outperforming the Blended: 50 Morningstar LSTA US Leveraged Loan Index + 50 ICE BofA US HY Constrained Index by 33 basis points (bps).1 HYBL underperformed its primary benchmark, the Bloomberg U.S. Aggregate Bond Index, in the fourth quarter by 152bps.

Performance

HYBL posted a positive return in the fourth quarter and outperformed its blended benchmark primarily due to credit selection within its high yield allocation. During the quarter, HYBL modestly increased its high yield bond allocation.

The top contributors to total return in the fourth quarter were SPDR Blackstone Senior Loan ETF (SRLN), Navient Corp, and The Gap Inc. The top detractors were Spirit Loyalty Cayman Ltd, Dish DBS Corp, and The Michaels Cos Inc.

Retail high yield funds experienced $6.2 billion of inflows in the fourth quarter while retail loan funds experienced net inflows totaling $0.4 billion.2

Top 10 Holdings Coupon Maturity Date Weight (%) 
SPDR BX/GSO SR LOAN ETF - N/A 3.71
POINT AU ROCHE PARK CLO, LTD. 11.7774 7/20/2034 1.10
CQP HOLDCO LP AKA CHENIERE 8.3801 4/25/2035 0.65
INTESA SANPAOLO SPA AKA INTESA 5.71 5/15/2029 0.62
SUNOCO LP / SUNOCO FINANCE CORP 4.50 10/20/2031 0.61
ARES LXVIII CLO LTD 13.9282 10/20/2034 0.60
BALLYROCK CLO 2020-2 LTD 11.8274 1/30/2031 0.59
XEROX HOLDINGS CORP 5.50 2/1/2028 0.56
ALLISON TRANSMISSION INC 3.75 8/15/2028 0.55
STARWOOD PROPERTY TRUST INC 4.375 1/20/2034 0.54

As of December 31, 2023, the top ten holdings accounted for 9.53% of the fund’s investments. The Fund Top Holdings are as of the date indicated, are subject to change and should not be relied upon as current thereafter. 

Fund Performance

  QTD
(%)
YTD
(%)
1 Year
(%)
3 Year (%) 5 Year
(%)
10 Year
(%)
Since Inception Feb 16 2022(%)
NAV 5.59 12.38 12.38 - - - 3.59
Market Value 5.15 11.85 11.85 - - - 3.59
Bloomberg US Aggregate Bond Index 6.82 5.53 5.53 -3.31 1.10 1.81 -2.33
SPDR Blackstone High Income Composite Index 4.97 13.44 13.44 3.92 5.54 4.49 4.63

Source: State Street Global Advisors, as of December 31, 2023. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit www.ssga.com for most recent month-end performance. Performance returns for periods of less than one year are not annualized. The market price used to calculate the Market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculates. If you trade your shares at another time, your returns may differ. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

 

Gross Expense Ratio: 0.70% Net Expense Ratio: 0.70%


The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.

Quarter in Review

The US loan market’s 2.87% return in the fourth quarter drove the index to its second-highest annual return of 13.32% for 2023. A strong fourth quarter rally of 7.16% powered high yield to an even higher 13.44% annual return.3

The Fed’s dovish commentary as it kept rates on hold for a third consecutive meeting in December re-energized the rally across bonds and equities underway since early November. The US 10-year bond yield returned almost to where it started the year, from lows of 3.25% in March and a peak at 5% in October.4 The S&P 500 rose roughly 25% through 2023 to end the year near its all-time high.5

The ongoing supportive supply/demand technical pushed average loan prices to their highest level of the year at $96.23 on December 31, suggesting repricing activity will pick up.6

Primary loan supply decreased to $103 billion over the fourth quarter, dominated by refinancings and extensions for the fifth straight quarter.7 The outstanding universe contracted by 1.2% to $1.39 billion to end 2023 due limited net loan supply, repayments and private credit takeouts.8

Against this, CLO managers took advantage of compressing liability spreads and a slightly improved equity arbitrage dynamic to price $28 billion of new transactions, up from $22.4 billion in the third quarter.9

Meanwhile, high yield bond prices increased nearly 7-points from their October low to close the year at $93.07.10

High yield issuance surged in November to finish the year at $176 billion, up $74 billion from 2022.11 After moderate outflows from high yield funds in the third quarter, the fourth quarter saw large outflows totaling $10 billion in October followed up by an even greater inflow of $12.8 billion in November as sentiment on rate cuts shifted.12

Managers continued to trade up-in-quality over the year, although a concurrent reach for yield enabled lower-rated CCCs to outperform for the final quarter and the year in both markets.13

Higher interest burdens have started to erode corporate interest coverage ratios. However, a combination of macroeconomic resilience, healthy corporate balance sheets heading into this cycle, and efforts by corporate borrowers to push out the near-term maturity wall have kept both loan and high yield defaults in line with long-term averages at 3.15% and 2.84%, respectively.14

Portfolio Positioning and Outlook

As we move into 2024, we believe floating rate loans, CLO debt, and high yield are likely to remain attractive even if the Fed begins cutting rates, given historically attractive all-in yields, moderate expected default rates, and stable technicals.

From a macro perspective, inflation is heading lower, but we don’t expect a smooth path down given ongoing wage growth in the broader economy. As a result, we expect central banks to likely be more patient cutting rates on the way out to ensure inflation is truly tamed.17

The US economy has proven surprisingly resilient to the Fed’s aggressive tightening cycle, but we remain cautious of the potential for elevated rates to cause a slowdown in growth. We also expect higher volatility and a higher average level for rates and inflation over the cycle to feature in the post-pivot environment.18

We believe high yield is well positioned going into 2024 as easing rate volatility combined with strong fundamentals and resurfacing retail fund flows should be able to offset the headwinds of slowing growth and a less supportive technical as supply increases.

There are hopes that pent-up demand, improved valuations (assuming a hard landing is avoided), and large piles of private equity dry powder may spur a pick-up in M&A activity, eventually leading to an uptick in LBO volumes. In the meantime, refinancing exercises are expected to remain the mainstay of supply, as corporate borrowers use ongoing strong demand to extend maturities.

Having largely pushed out 2024 maturities, borrowers face a wall of roughly $1.3 trillion of US high yield and leveraged loans due to mature between 2025 to 2027.19 They will have to refinance these at substantially higher debt costs, and we expect private lenders to continue to offer a potential alternative refinancing solution for some of the more troubled credits.

CLO creation is forecast to remain near the same levels as 2023, however banks are expecting an increase in private credit CLO issuance from last year’s record $25 billion.20 CLO liability spreads have contracted further in early January, but managers will remain focused on the CLO equity arbitrage dynamics given the potential for loan repricings to reduce overall spreads on the asset side of the equation.

We expect the default environment to remain benign over the coming year given the relatively small current distressed universe.21 Outside of the more cyclical and consumer facing industries, we expect credit deterioration to be more idiosyncratic in nature, while the higher-quality high yield universe may also reduce levels of stress and defaults in that market.

We will need to play defense and offense to seek to both preserve and drive performance. That means targeting larger, cash-flow generative businesses in defensive and high-growth sectors. It also means identifying the opportunities that will inevitably emerge during periods of elevated volatility, tighter credit conditions and increased credit dispersion. We believe that thematic investing with a strong team which has weathered many cycles should continue to give us an edge during the next part of this cycle.

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