After February Losses, Position Defensively
Rate and equity volatility are unlikely to abate before rates peak. Owning high quality, uncorrelated assets may help defend portfolios against losses during periods marred by episodic price swings.
Equities posted broad gains as large, mid, and small caps all climbed last week. West Texas Intermediate (WTI) posted a 4.4% gain after a volatile session last Friday when the Wall Street Journal reported that the United Arab Emirates (UAE) was considering leaving the Organization of the Petroleum Exporting Countries (OPEC).1 Prices stabilized shortly thereafter when UAE officials denounced the report.
US Remains Resilient Despite High Rates
When Federal Reserve (Fed) Chairman Jerome Powell testified before Congress this week, he maintained a hawkish tone, indicating that inflation must continue to fall before the central bank can consider easing its policy rate. Yet the US economy continues to show resilience amid the elevated rates – the Institute for Supply Management Services Index held steady at 55.1 for February, versus the consensus estimate of 54.5.2
Get Defensive with Active Fixed Income
The rally in stock and bond markets rolled over in February. Large caps suffered a peak-to-trough drawdown of 5%, while the MOVE Index (a measure of rates volatility) surged 24% as traders increasingly dismiss the possibility of a Fed rate cut later this year.3 As rate and equity volatility are unlikely to abate before rates peak, owning high quality, uncorrelated assets may help defend portfolios against losses during periods marred by episodic price swings.
Implementation Idea: SPDR® DoubleLine® Total Return Tactical ETF (TOTL)
Actively managed by DoubleLine Capital, the SPDR® DoubleLine® Total Return Tactical ETF (TOTL) is a defensive core fixed income strategy that combines traditional bond sectors found in the US Aggregate Bond Index with credit-sensitive sectors, such as high-yield corporates and bank loans. Most importantly, the fund has an embedded mortgage bias which enhances portfolio credit quality as these securities are implicitly backed by the federal government.
While TOTL’s exposure to investment-grade debt stands at 76%, 60% of the fund is AAA rated.4 In fact, the fund’s AAA exposure ranks in the eighth percentile relative to its peers, and is 19 percentage points higher than the peer group median allocation.5
As a result of DoubleLine’s skilled active management, TOTL has consistently exhibited defensive outcomes that might benefit investors during times of market stress. TOTL’s rolling six-month returns since inception (see below) show it has experienced lower correlation to stocks, lower volatility, and lesser drawdowns in 82%, 92%, and 90% of the 91 observable periods relative to its peer group median, respectively.6
Rolling Six-month Returns Analysis Comparing TOTL to Its Peer Group Median
Percent of Observations Where TOTL Displayed:
TOTL ranks in the top 20th percentile in its Morningstar Intermediate Core-Plus peer group year to date, while also outperforming its benchmark and peer group median by 103 basis points (bps) and 39 bps, respectively.7
TOTL Standard Performance as of December 31, 2022
