SPDR® DoubleLine® Total Return Tactical ETF – Q1 2021 Commentary
Performance For the quarter ending March 31st, 2021, the DoubleLine Total Return Tactical ETF outperformed the Bloomberg Barclays US Aggregate Bond Index. The outperformance was driven by the portfolio’s shorter duration positioning and asset mix.
Duration positioning had a large impact on relative performance as the US Treasury yield curve bear steepened with two-year yields up 4 basis points (bps), 10-year yields up 83 bps, and 30-year yields up 77 bps.1 The fund benefitted from its exposure to Bank Loans, Emerging Market Debt, and structured product risk sectors. Bank Loans were the best performing sector over the period as their floating rate nature fared well as investor expectations for higher growth and higher interest rates began to materialize.
The fund’s allocation to securitized credit sectors such as Commercial Mortgage-Backes Securities (CMBS), Asset-Backed Securities (ABS), and Non-Agency Residential Mortgage-Backed Securities (RMBS) contributed to outperformance as spreads continued to grind tighter on positive vaccination and reopening news. Allocation to emerging market debt also contributed to outperformance bolstered by strong returns from lower rated securities as investors continued to increase their appetite for risk. Government-backed assets negatively impacted performance over the quarter as longer US Treasury rates increased substantially. Investment Grade corporate credit was the worst performing sector during the period given their longer duration.
Quarter in Review The duration of the portfolio increased by 1.6 years to finish the quarter at 4.8 years. The portfolio’s Agency MBS and US Treasury allocation targets decreased by 1.5% and 0.5%, respectively. The portfolio increased its ABS allocation target by 1%, CLO allocation target by 0.5%, and High Yield corporate credit allocation target by 0.5%.
Agency Mortgage-Backed Securities
Commercial Mortgage-Backed Securities
Asset Backed Securities
Source: DoubleLine, State Street Global Advisors. Allocations are as of March 31, 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 The calendar year of 2021 is expected to be a year of economic resurgence. The Federal Reserve currently forecasts Real GDP to grow by 6.5% year-over-year, a rate not seen since 1984. Fiscal policy has been a key driver in boosting consumer savings rates during the pandemic and we expect to see a material increase in consumer spending during the second half of 2021 as state economies reopen. The Federal Reserve’s recently instated average inflation targeting (FAIT) policy implies the Federal Reserve will keep policy steady, even with the latest inflation print above two percent. Given our view on rates, we are likely to continue positioning the portfolio with a shorter duration than the benchmark. We continue to favor securitized credit over corporate credit as record-low corporate yields combined with a historically high duration make corporate credit less appealing in a rising rate environment.
1DoubleLine Capital L.P. as of March 31, 2021.
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.
Emerging Market Fixed Income International bonds issued by governments or corporations located in emerging market countries that are considered sovereign (issued in something other than local currency).
High Yield Based on the two main credit rating agencies, high-yield bonds carry a rating below “BBB” from S&P, and below “BAA” from Moody’s. Bonds with ratings at or above these levels are considered investment grade. To compensate for the added risk, yields will typically be higher than investment-grade issues.
Investment-Grade Corporate Credit A corporate bond with a rating that indicates that it has a relatively low risk of default. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters “A” and “B” to identify a bond’s credit quality rating. “AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality) are considered investment grade.
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.
Yield Curve 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 values of debt securities may decrease as a result of many factors, including, by way of example, general market fluctuations; increases in interest rates; actual or perceived inability or unwillingness of issuers, guarantors or liquidity providers to make scheduled principal or interest payments; illiquidity in debt securities markets; and prepayments of principal, which often must be reinvested in obligations paying interest at lower rates.
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