In the third quarter, the SPDR DoubleLine Total Return Tactical ETF outperformed the Bloomberg US Aggregate Bond Index by 0.10%. The relative outperformance was primarily driven by the fund’s shorter duration positioning relative to the benchmark, as US Treasury yields rose after the Federal Reserve announced it is preparing the tapering of its emergency purchase program. The best performing sector was Non-Agency Residential Mortgage-Backed Securities (RMBS) as it benefitted from strengthening household balance sheets, a continued increase in home prices, and an improvement in cure rates. Bank Loans and Collateralized Loan Obligations also generated strong returns over the period due to their interest income while elevated new issue volume was met with strong investor demand. Commercial Mortgage-Backed Securities (CMBS) also generated positive returns as market fundamentals continue to improve and delinquency rates decline. Strong Asset-Backed Securities performance can be attributed to aircraft related holdings as international travel restrictions were eased. Investment Grade corporate credit and Emerging Market debt performed poorly because of their longer duration profile.
Quarter in Review:
The duration of the fund slightly decreased by 0.2 years to finish the quarter at 3.9 years. Sector allocations within the fund have been relatively unchanged over the quarter.
|Security Type||Fund (%)||Index (%)|
|Agency Mortgage-Backed Securities||30.5||27.4|
|Commercial Mortgage-Backed Securities||10.7||2.1|
|Investment Grade Corporate||6.2||26.1|
|High Yield Corporate||4.9||0.0|
Source: DoubleLine, State Street Global Advisors. Allocations are as of September 30, 2021 and are subject to change without notice. Asset allocation is a method of diversification that 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.
Portfolio Positioning and Outlook
As the third quarter came to a close, we remain cautious on duration risk as we expect year-over-year inflation to remain high. The fund will likely maintain a duration shorter than the benchmark to best navigate a rising rate environment, which is the largest risk to performance in the near term as the Federal Reserve is preparing to taper its emergency purchase program. Two of the largest long-duration debt segments in the US market are Investment Grade corporate credit and US Treasuries. Because of their large presence in the market, they naturally make up sizeable allocations in the Bloomberg US Aggregate Bond Index. The fund will maintain exposure to both US Treasuries and Investment Grade corporate credit, though allocations within the fund to these sectors will likely remain smaller than the benchmark to best navigate a rising rate environment. Credit products have continued their strong recovery against a backdrop of a strengthening economy and robust housing market. There remains relative value in structured fixed income sectors as spreads remain attractive relative to corporate credit, while investor demand has remained firm.
Asset-backed securities (ABS)
Financial securities backed by income-generating assets such as home mortgages, auto loans and home equity loans.
Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.
Bloomberg Barclays US Aggregate Bond Index
A benchmark that provides a measure 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.
A commonly used measure, expressed in years, that measures a portfolio’s sensitivity to changes in interest rates
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).
The difference between a security’s yield and the yield on a reference security.
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year US Treasury debt.
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The views expressed in this material are the views of DoubleLine Capital LP through the period ended September 30, 2021 and are subject to change based on market and other conditions. 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.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, 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.
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. Past performance is not a guarantee of future results.
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