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SPDR® SSGA Multi-Asset Real Return ETF – Q4 2020 Commentary
During the fourth quarter of 2020, RLY finished up in absolute returns, but underperformed its custom strategic benchmark. The fund finished the quarter with overweights to natural resource equities, commodities, global infrastructure and gold.
Performance
The main drivers of underperformance were an overweight to gold and positioning within inflation-linked bonds. Elsewhere, positioning within global natural resource equities proved beneficial. While the underweight allocation to core commodities aided relative performance, negative tracking from the underlying fund offset gains.
Gold remained attractive across most technical factors we monitor while real yields also supported our targeted overweight. The precious metal offered a tactical hedge given uncertainties around the looming US election, ongoing Brexit negotiations, and rising COVID-19 cases and the resulting mitigation measures. Unfortunately, gold encountered headwinds as rates started to rise on vaccine-induced optimism for economic recovery in 2021 and the overweight dented performance.
Although we started to eliminate our overweight to inflation-linked bonds in November, our targeted allocation to begin the quarter detracted from performance. US TIPS advanced on the quarter as the increase in oil prices, as well as a modest increase in US inflation expectations on the back of better-than-expected incoming economic data supported the bonds, but they still lagged other assets in the portfolio. Global natural resource equities benefited from the continuation of a reflation trade which lifted assets tied to the recovery in economic growth.
Portfolio Positioning and Outlook
Throughout the quarter, we added to broad commodities and REITs at the expense of inflation-linked bonds. Additionally, we reduced the size of our gold overweight. This was partially driven by our proprietary risk indicator, which eased into a more supportive regime. Our models have also become more sanguine on broad commodities as improving prospects for the energy complex, attractive fundamentals for industrial metals and strong price pressure for agriculture buoy our outlook.
Across the commodity complex, we’ve held a favorable view of gold since the middle of 2019 while being less enthusiastic about the prospects for broader commodities. Gold has run into some speedbumps as interest rates have moved higher, even though most of the rise has resulted from a steady grind up in breakeven rates of inflation. Our view on gold is not much changed, however. Technicals remain firm in terms of trend identification, real yields still remain low, and if heavy government spending leads to some concern about the value of the US dollar, gold should be in good stead on that front as well. In broader commodity markets, we have adopted a more constructive tone.
Near-term risks abound as the COVID-19 crisis continues to weigh on economic activity, and any additional lockdowns would choke off burgeoning demand. But a variety of drivers support the complex as we move into 2021. From a financial market perspective, price momentum has gained steam and there is less of a carrying cost with the average commodity futures curve having moved into a state of slight backwardation. Commodities are also likely to benefit from intermediate-term USD weakness, a renewed focus on infrastructure projects and continued recovery in China’s economy — which should help boost sectors such as industrial metals and agricultural products. Overall, whether we look towards 2021 as a year of recovery, reopening or renormalization, diversifying our growth asset exposure into broad commodities looks like a compelling risk/reward proposition.
Our somber outlook for REITs stems from negative price momentum and sluggish earnings and sales expectations as mobility restrictions have weighed on the sector.
Inflation expectations in the US as measured by the 5-year breakeven rate now exceed pre-COVID levels as investors contemplate the potential for rising inflation. As vaccines roll out globally, assuming they remain effective, pent-up demand should be released and economic growth should continue to recover. Further, this increased demand, the potential for further US dollar depreciation, increased infrastructure spending and a more accommodative Fed create budding inflation pressures that may discourage investors from holding nominal bonds in favor of TIPS.
Market Regime Forecasts
The Market Regime Indicator (MRI) employs a quantitative framework and forward-looking market indicators, including equity- and currency-implied volatility, as well as credit spreads, to identify the current market risk environment. Tracking risk appetite shifts in the market cycle helps frame tactical asset allocation and volatility targets.
Real Estate Investment Trust (REIT)
Companies that own and operate commercial properties, such as office buildings and apartment complexes.
Bloomberg Barclays US Government Inflation-linked Bond Index
A benchmark that includes publicly issued, US Treasury inflation-protected securities that have at least one year remaining to maturity on index rebalancing date and that have an issue size equal to or in excess of $500 million. Bonds must be capital-indexed, linked to an eligible inflation index, be denominated in US dollars and pay coupon and principal in US dollars. The notional coupon of a bond must be fixed or zero.
DBIQ Optimum Yield Diversified Commodity Index Excess Return
A strategy index that invests in 14 different commodities using futures, re-weighting their place in the portfolio each November with a view to minimize the effects of contango while maximizing the effects of backwardation. Contango occurs when the price of a futures contract is greater than the commodity spot price, while backwardation occurs when the opposite is true. The 14 commodities included in the index are gasoline, heating oil, Brent crude oil, WTI crude oil, gold, wheat, corn, soybeans, sugar, natural gas, zinc, copper, aluminum and silver.
Treasury Inflation Protected Securities (TIPS)
Treasury securities that are indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are backed by the US government and are thus considered an extremely low-risk investment. The par value of TIPS rises with inflation, as measured by the Consumer Price Index, while the interest rate remains fixed.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
Foreign (non-U.S.) Securities may be subject to greater political, economic, environmental, credit and information risks. Foreign securities may be subject to higher volatility than U.S. securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets
Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors.
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.
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.
Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).
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