SPDR® Nuveen Municipal Bond ESG ETF [MBNE] – Q2 2023 Commentary
Curve positioning was the largest positive contributor to performance for the quarter, and rating allocation and selection aided performance. Sector allocation was a slight detractor from performance.
Performance
Although the yield curve steepened slightly during June, the yield curve flattened overall during Q2. At the end of June the yield curve was inverted between 1 and 9 years, but had an upward slope starting at 9 years. As such, an overweight to bonds maturing in less than 2 years and in 12 to 22 years aided performance, as did an underweight to bonds maturing in 2 to 12 years. An overweight to bonds rated single-A, double-B and unrated bonds, as well as an underweight to bonds rated triple-A aided performance. An underweight in industrial development bonds hurt performance but was mostly offset by an underweight to housing bonds. Security selection also aided performance during the quarter.
Fund Performance
| 1 Month (%) | QTD (%) | YTD (%) | 1 Year (%) | 3 Year (%) | 5 Year (%) | 10 Year (%) | Since Inception Apr 04 2022 (%) |
|
| NAV | 1.86 | -0.16 | 1.89 | 2.53 | - | - | - | 0.96 |
| Market Value | 0.92 | -0.08 | 2.04 | 2.36 | - | - | - | 1.02 |
| Bloomberg 3-15 Year Blend (2-17) Municipal Bond Index | 0.78 | -0.46 | 1.93 | 2.97 | -0.37 | 1.91 | 2.48 | 0.90 |
Source: State Street Global Advisors, as of June 30, 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. The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. 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 do not represent actual fund performance and are for illustration purposes only. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling exchange traded funds. It is not possible to invest directly in an index. 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.
Gross Expense Ratio: 0.70% Net Expense Ratio: 0.70%
Quarter in Review
Municipal bond market performance was volatile in the second quarter, with uncertainty surrounding inflation and the Federal Reserve’s (Fed) actions in response to data releases continued to dominate market direction. Additionally, flows into municipal funds remained negative until June. However, strong investor interest in individual bond portfolios, as well as continued low issuance kept municipals well positioned. Fundamentals remained solid, although municipal revenues have slowed as tighter economic conditions pass through.
The 10-year municipal-to-Treasury yield ratio varied during the quarter, as Treasury volatility did not pass directly through to municipals. The ratio ended the quarter at 67%, just cheaper than the 65% quarter-end rate. This is still relatively rich compared to the long-term historical average of ~80%. Conversely, the 30-year ratio was more stable and ended the quarter in line with historical averages at 90%, the same level where it started the year.1
Supply continued its slow pace to start the year, although issuance picked up in June as municipal fiscal years come to an end and interest rates are expected to remain elevated for longer. Municipal reinvestment dollars, proceeds from coupon payments, bond maturities and refundings, continue to outpace supply, and allowed the market to easily absorb higher June issuance as well as the FDIC’s liquidation of municipal holdings from banks bankruptcy proceedings.2
Portfolio Positioning and Outlook
During the quarter we reduced our exposure to short-intermediate positioned bonds and added exposure in longer positioned bonds. This has increased duration slightly within the portfolio, and we are now longer than the benchmark. While we do believe there is likely to be some continued volatility surrounding the Fed outlook, we expect duration to be beneficial to income moving forward. By utilizing a barbelled approach we can take advantage of income available at the short end of the yield curve, as well as intermediate and longer without moving overall duration meaningfully.
We see two main factors driving third quarter performance. First, the technical environment is likely to continue to be supportive. Muted issuance and strong demand are current tailwinds for the asset class, and inflows for both long duration and high yield have been positive year-to-date, and we have begun to see broader inflows into the municipal market.
Second, credit fundamentals remain strong. Municipalities have record levels of tax collections and cash on hand. Credit conditions are solid, even in the face of interest rate volatility. Credit upgrades have continued to outpace downgrades.3 And municipalities tend to do well in most economic environments as essential service monopolistic providers.
We believe our bottom-up, fundamental credit research process is well-positioned to take advantage of the opportunities we are seeing in the market today.