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Bond Compass

Bond ETF Ideas to Beat the Heat and the Fed

Q3 2023

Head of SPDR Americas Research

In a reversal from last quarter, guidance from Federal Reserve (Fed) policymakers and traders’ forecasts have coalesced around more rate hikes on the horizon.1 Previously, traders were forecasting rate cuts by yearend.2

The reason for the hawkish outlook? Stubborn inflation, a resilient consumer, healthy labor trends, and strong equity markets.

At the same time, consumer and labor market strength have sparked hope that the US economy will avoid a recession, even though the yield curve remains inverted.3

This optimism has fueled credit sector returns despite the negative ratings trends, where downgrades have outpaced upgrades for four consecutive quarters.4 And higher returns have pushed valuations to unattractive levels — as spreads sit 20% below their historical average.5

So, where does that leave bond investors this summer? Consider the following to help address current fixed income challenges:

Active core strategies to position portfolios for evolving monetary policy, higher rates, and mixed fundamentals in credit markets.

Short-duration bonds where elevated yields offer income while minimizing total risks — with potential for more income if the Fed does hike rates.

Hybrid exposures like convertible securities that allow portfolios to extend risk in a more balanced way.

Get Flexible With an Active Total Return Core ETF

By combining traditional and non-traditional fixed income asset classes to maximize total return over a full market cycle, active sector allocation and security selection can potentially better defend against rate and credit risk than core aggregate bonds.

Analysis of the actively managed SPDR® DoubleLine® Total Return Tactical ETF’s (TOTL) rolling six-month returns versus its peer group median highlights the fund’s defensive qualities:

  • 83% lower correlation to stocks
  • 93% less volatility
  • 90% lower drawdowns6

Lower volatility from the largest part of your bond portfolio takes on greater importance in today’s market, given that the 90-day realized volatility of the Bloomberg US Aggregate Bond Index (Agg) is back over 6%. The Agg is now in the 93rd percentile for volatility over the last 35 years7 — surpassing both the Great Financial Crisis and the COVID-19 pandemic.

Core bonds also continue to be mired in double-digit drawdowns —their worst ever, as shown below. Duration on the rate-sensitive Agg is already at 6.3 years, 30% above its long-term average and in its historical 95th percentile.8 And, there’s little hope for light at the end of the tunnel if the Fed follows through on its rate hikes.

That’s why we believe it makes sense to own high-quality, uncorrelated assets that can help limit a portfolio’s rate sensitivity and defend against losses during periods of rate and total market volatility.

TOTL combines the Agg’s traditional bond sectors with credit-sensitive sectors such as high yield corporates and bank loans. And the fund’s embedded mortgage bias enhances its credit quality, as these securities are backed by the federal government.

With 74% exposure to investment-grade rated debt, 58% of TOTL is AAA rated.9 As a result, it has been able to mitigate volatility while remaining a source of returns.

In addition to outperforming the Agg by 145 basis points (bps) over the past year,10 TOTL also exhibits:

  • Greater yield (5.45% versus 4.8%)11
  • Better yield-per-unit-of-duration (0.87 versus 0.76)12
  • Higher yield-per-unit-of-volatility (0.71 versus 0.53)13

Trim Duration in Your Active Total Core

Investors who want to sharply trim duration in the core, while retaining broad sector exposure and the potential for alpha generation, may want to consider the short-term version of TOTL.

The SPDR® DoubleLine® Short Duration Total Return Tactical ETF (STOT) employs a similar approach to TOTL, but seeks to maintain a dollar weighted average effective duration between one and three years.

Outperforming its benchmark and the Agg by 280 and 461 bps over the past year,14 STOT now has a:

  • Yield of 5.12%
  • Yield-per-unit-of-duration of 4.2
  • Yield-per-unit-of-volatility of 2.115

Higher Rates in Ultra-short Markets

Potential for the fed funds rate to reach 5.75% this year16 is creating above-average income opportunities in ultra-short duration markets — the sector most sensitive to Fed policy.

US 1-3 month T-bills have historically tracked the fed funds rate, given their ultra-short and cash-like nature, as shown below. If this relationship holds, this ultra-short duration of only 0.08 years could see its income potential increase alongside policymakers’ actions.17

A 5.75% yield on US 1-3 month T-Bills also would further increase the differential with the 5% earnings yield on the S&P 500 Index — indicating relative attractiveness to stocks as well as core bonds.18

Low duration, high yield, and significantly low volatility make US 3-month T-bills the closest market to cash instruments. The sector’s yield-per-unit-of-volatility is an astounding 12.5 (5.25% yield versus 0.42% daily standard deviation over the past year) compared to 0.53 for the broader Aggregate bond market.19

For exposure to this tenor of the yield curve, consider the $28 billion SPDR® Bloomberg 1-3 Month T-Bill ETF (BIL).

Investors who are comfortable with a little more volatility can potentially eke out more yield with the SPDR® Bloomberg 3-12 Month T-Bill ETF (BILS).

This segment has a slightly higher yield (5.34%), duration (0.33 years), and volatility (0.52% daily standard deviation of returns) — but with the same comparable advantages versus broader bonds.20

Also, an active ultra-short strategy can access other attractive bond segments such as securitized credits, asset-backed securities, mortgage-backed securities, and commercial mortgage-backed securities.

The actively managed SPDR® SSGA Ultra Short Term Bond ETF (ULST) invests at least 80% of its net assets in a diversified portfolio of US dollar-denominated investment-grade fixed income securities, including up to 10% in high yield. The fund targets a duration of 1 year or less and a weighted average maturity of 2.5 years or less.

Given its credit selection and risk management tactics, ULST currently offers a higher yield than the broader Agg (SEC Yield of 5.3% versus Agg yield-to-worst of 4.8%),21 but with 76% less volatility.22

With ULST, lower volatility doesn’t mean lower returns. The ETF is outperforming the Agg this year (+2.39% versus 2.09%) and over the past 12 months (+4.24% versus -0.94%). It’s also outperforming its peer group median manager by 43 bps over the past 12 months.23

Due to their maturity focus, income potential, and volatility profile relative to the broader market, BIL, BILS, and ULST may help bond investors strike a better balance between risk and return this summer.

Add Hybrids to Seek Upside in a More Balanced Way

Credit markets have produced positive returns this year, despite weak fundamentals and ratings sentiment. But positive returns have pushed credit spreads on high yield to around 400 bps.24 That’s roughly 20% below the historical long-term average.25

Somewhat stretched valuations can impact subsequent returns, as future gains may not benefit from the spread compression witnessed so far this year. Historically, when spreads move at or below 400 bps, subsequent 12-month returns for high yield, while positive, are below average (5.4% versus 7.2%).26 Despite those risks, high yield bonds rallied in the first half just as stocks did. But given current valuations, the path ahead may be more challenging.

Investors seeking to participate in the current market rally, but with less volatility and more constructive valuations, may want to consider convertible securities due to their sector exposure, historical volatility traits, and more bond-like profile.

More than half the exposure (52%) in the SPDR® Bloomberg Convertible Securities ETF (CWB) is allocated to the three sectors that are leading GICS sector returns so far this year — Consumer Discretionary, Technology, and Communication Services.27 But the fund has exhibited 37% lesser volatility than the S&P 500 this year.28

While valuations are stretched within equities (the S&P 500 price-to-earnings ratio is above average),29 convertibles trade in a more bond-like balanced profile, as their delta to the underlying equities is 26% below its historical average.

Convertibles’ low delta is also met with a higher than average premium, as shown below. This shows convertibles are trading more like bonds and that valuations aren’t stretched. And, if we look at the price-to-earnings ratio (P/E) of underlying firms, the average P/E is 15 and below its recent 5-year average of 17.30

Unstretched valuations for converts, and for the underlying equities, are fueling forecasts for higher earnings growth than the market (20% vs.14%).31

And while convertibles is a non-traditional bond sector, liquidity is not a concern. Issuance is up 198% year-over-year, as issuers are looking to save on coupon costs versus straight debt, considering converts carry a lower coupon in exchange for equity upside.32

And, the issuance is not all below investment-grade (IG), speculative issuers. In fact, IG bonds now account for 33.5% of 2023 issuance.33 Lastly, more balanced bond structures (low delta) have accounted for 100% of all 2023 issuance.34 These trends may lead to supportive risk/reward characteristics for the overall market, as it’s not being inundated with stock-like, weak credits.

Overall, convertible securities may offer risk-controlled equity exposure with potential for upside growth — but with less volatility than straight equity.

If you’re an investor who wants to participate in the market’s rally in a more measured way, take a look at converts and CWB.

What’s Next for Bond Investors?

For more insight into how to manage portfolios in this challenging environment, check out our Market Trends page for timely analysis, macroeconomic perspectives, and ETF flows data.


Fund Performance as of 6/30/2023

Ticker Name QTD YTD Annualized Inception Date Gross Expense Ratio
        1 Year 3 Year 5 Year 10 Year Since Inception    
TOTL SPDR® DoubleLine® Total Return Tactical ETF (NAV) -0.10% 3.16% 0.49% -2.94% 0.28% - 0.80% 2/23/2015 0.55
TOTL SPDR® DoubleLine® Total Return Tactical ETF (MKT) -0.03% 3.27% 0.88% -2.94% 0.34% - 0.83% 2/23/2015 0.55
STOT SPDR® DoubleLine® Short Duration Total Return Tactical ETF (NAV) 1.15% 2.67% 3.24% 0.08% 1.36% - 1.30% 4/13/2016 0.45
STOT SPDR® DoubleLine® Short Duration Total Return Tactical ETF (MKT) 1.08% 2.58% 3.23% 0.10% 1.35% - 1.31% 4/13/2016 0.45
BIL SPDR® Bloomberg® 1-3 Month T-Bill ETF (NAV) 1.18% 2.25% 3.56% 1.16% 1.38% 0.82% 0.78% 5/25/2007 0.1345
BIL SPDR® Bloomberg® 1-3 Month T-Bill ETF (MKT) 1.20% 2.26% 3.57% 1.17% 1.39% 0.82% 0.78% 5/25/2007 0.1345
BILS SPDR® Bloomberg® 3-12 Month T-Bill ETF (NAV) 1.02% 2.15% 3.22% - - - 1.05% 9/23/2020 0.135
BILS SPDR® Bloomberg® 3-12 Month T-Bill ETF (MKT) 1.04% 2.14% 3.22% - - - 1.07% 9/23/2020 0.135
ULST SPDR® SSGA Ultra Short Term Bond ETF (NAV) 1.04% 2.38% 4.24% 1.49% 1.82% - 1.39% 10/9/2013 0.2
ULST SPDR® SSGA Ultra Short Term Bond ETF (MKT) 1.02% 2.36% 4.27% 1.44% 1.82% - 1.40% 10/9/2013 0.2
CWB SPDR® Bloomberg Convertible Securities ETF (NAV) 4.68% 9.45% 10.83% 7.51% 9.02% 9.67% 10.84% 4/14/2009 0.4
CWB SPDR® Bloomberg Convertible Securities ETF (MKT) 4.96% 9.74% 10.93% 7.43% 9.08% 9.65% 10.85% 4/14/2009 0.4

Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit for most recent month-end performance. Performance returns for periods of less than one year are not annualized. The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.

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