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.
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
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.
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
1 Bloomberg, as of March 3, 2023.
2 Bloomberg, as of March 3, 2023.
3 Bloomberg Finance L.P., as of February 28, 2023. Large caps = S&P 500 Index. Past performance is not a reliable indicator of future performance.
4 ssga.com. as of February 28, 2023.
5 Morningstar, ssga.com, as of February 28, 2023. Peer group defined as all US-listed ETFs and US domiciled mutual funds (oldest share class) in the Intermediate Core-Plus Morningstar Category.
6 Morningstar, March 1, 2015 to February 28, 2023. Analysis is based on rolling six-month returns with a one-month moving step, creating 91 observable periods. Peer group defined as all US-listed ETFs and US domiciled mutual funds (oldest share class) in the Intermediate Core-Plus Morningstar Category. 226 funds analyzed. US equities defined as the S&P 500 Index. Past performance is not a reliable indicator of future performance.
7 Morningstar, as of March 3, 2023.
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Actively managed ETFs do not seek to replicate the performance of a specified index. The Fund is actively managed and may underperform its benchmarks. An investment in the fund is not appropriate for all investors and is not intended to be a complete investment program. 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.
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.
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.
Non-diversified funds that focus on a relatively small number of securities tend to be more volatile than diversified funds and the market as a whole.
Morningstar Percentile Rankings are based on the average annual total returns of the funds in the category for the periods stated and do not include any sales charges or redemption fees, but do not include 12b-1 fees and the reinvestment of dividends and capital gains distributions. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. Rankings for each share class will vary due to different expenses. Had sales charges or redemption fees been included, total returns would be lower.
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