SPDR® Blackstone High Income ETF (HYBL) – Q2 2023 Commentary
High yield and loans both experienced positive returns in the second quarter of 2023. HYBL returned 1.78%, outperforming its primary benchmark, the Bloomberg US Aggregate Bond Index, in the first quarter by 262 bps.1
Performance Commentary
HYBL posted a positive return in the second quarter but underperformed its blended benchmark primarily due to credit selection within its loan allocation. Asset allocation net of cash drag was a positive contributor. During the quarter, HYBL modestly increased its collateralized loan obligations (CLO) debt allocation and repositioned its loan allocation by quality closer to benchmark from more underweight risk.
The top contributors to total return in the second quarter were Carnival Corp, Rakuten Group Inc, and Point Au Roche Park CLO, Ltd. The top detractors were Phoenix Services, Icahn Enterprises LP, and PRA Group Inc.
Retail high yield funds experienced $3.6 billion of inflows in the second quarter while outflows for retail loan funds experienced continued net outflows totaling $7.9 billion.2
| Top 10 Holdings | Coupon | Maturity Date | Weight (%) |
|---|---|---|---|
| POINT AU ROCHE PARK CLO, LTD. | 11.3504 | 7/20/2024 | 1.03 |
| ARES LXVIII CLO LTD | 13.6339 | 4/25/2035 | 0.61 |
| SUNOCO LP / SUNOCO FINANCE CORP | 4.5 | 5/15/2029 | 0.6 |
| BALLYROCK CLO 2020-2 LTD | 11.4004 | 10/20/2031 | 0.57 |
| HUGHES SATELLITE SYSTEMS CORP AKA EH HOLDINGS CORP | 6.625 | 8/1/2026 | 0.52 |
| CARLYLE US CLO 2021-9 LTD | 11.8804 | 10/20/2034 | 0.51 |
| PERATON CORP | 8.9523 | 2/1/2028 | 0.5 |
| ONEMAIN FINANCE CORP | 3.5 | 1/15/2027 | 0.49 |
| HOWMET AEROSPACE INC | 3 | 1/15/2029 | 0.49 |
| CDI ESCROW ISSUER INC | 5.75 | 4/1/2030 | 0.49 |
As of June 30, 2023, the top ten holdings accounted for 5.81% of the fund’s investments. The Fund Top Holdings are as of the date indicated, are subject to change and should not be relied upon as current thereafter.
Fund Performance
| QTD | YTD | 1 Year | 3 Year | 5 Year | 10 Year | Since Inception Feb 16 2022 | |
|---|---|---|---|---|---|---|---|
| NAV | 1.78% | 5.07% | 8.48% | - | - | - | -0.09% |
| Market Value | 1.79% | 4.94% | 8.25% | - | - | - | 0.16% |
| Bloomberg US Aggregate Bond Index | -0.84% | 2.09% | -0.94% | -3.96 | 0.77% | 1.52% | -5.49% |
| SPDR Blackstone High Income Composite Index | 2.39% | 5.96% | 9.85% | 4.80% | 3.68% | 4.22% | 1.21% |
Source: State Street Global Advisors, as of June 30, 2023. 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 www.ssga.com for most recent month-end performance. The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. Performance returns for periods of less than one year are not annualized. The market price used to calculate the Market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculates. If you trade your shares at another time, your returns may differ. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Gross Expense Ratio: 0.70% Net Expense Ratio: 0.70%
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.
Quarter in Review
Floating rate loans outperformed high yield bonds in the second quarter against the backdrop of a still-hawkish Federal Reserve Bank (Fed). Overall credit market performance over the first half has rebounded strongly from last year’s negative returns.
Rising rates pushed the US loan market to its strongest start since the Global Financial Crisis, gaining 3.2% over the second quarter and 6.48% over the first six months.3
CLO debt tranches also performed favorably posting a 2.43% return for the quarter. Lower-rated tranches outperformed in both Q2 and Q1, in stark contrast to 2022 where just AAA-rates CLOs finished the year in positive territory.4
High yield bonds lagged loans and CLOs, although the quarter’s 1.75% return contributed to a 5.38% return for the YTD.5
This performance came against ongoing macro and rate volatility and a market that appears to have acquiesced to the view that rates will need to stay at higher levels for longer.6 The market is now pricing in a terminal rate of 4%, significantly above the 2.65% anticipated in early May.7
After recovering from the March banking sector stress in April, credit markets weakened again in May weighed by the US debt ceiling wranglings.8 June’s return to form came as hopes for a soft landing amid ongoing strong economic data helped fuel a strong equity market rally.
Technicals have also supported performance, given ongoing supply shortage across loans, high yield and CLOs. The loan market issuance of $47.7 billion in Q2 compares to $52.4 billion in Q1.9 Overall issuance through the first half is 40% behind last year’s pace and at its lowest level since 2010.10 High yield issuers improved on the first quarter with the $53 billion of issuance pushing the YTD total close to 2023’s full-year total.11 Even so, high yield supply is depressed compared to historical standards, and ongoing rising star upgrades are further depleting the outstanding universe. Refinancings and extensions accounted for the bulk of the quarter’s loan and high yield supply.12
Demand for loans weakened as CLO supply fell by 43% compared to the first quarter,13 while $7.9 billion of outflows from loan mutual funds and ETFs made this the fifth straight quarter of withdrawals. By contrast, high yield funds experienced $3.6 billion of inflows during the quarter.14
Default activity has risen to a two-year high of 2.94% for loans and 2.71% for high yield. These are nearing their historical averages of 3.1% and 3.2% respectively.15
2023 Returns of Major US Fixed Income Indices
Source: Bloomberg and LCD, as of June 30, 2023. Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Portfolio Positioning and Outlook
Prospects for higher-for-longer rates should underpin loan market performance over the near term, given their history of performing well through a rising rate environment. Despite pausing its 15-month hiking campaign in June,16 the Fed is expected to hike again at July’s meeting,17 although the need for additional hikes may depend on future economic data releases.
Floating rate CLOs should also continue to perform well as rates stay higher, while high yield and loans have both performed well following a Fed pause.18
Sentiment remains upbeat, perhaps as ongoing economic resilience fuels hopes for a soft landing.The technical support that has underpinned prices and spreads over the first half is likely to continue over the near term, and barring a macro or geopolitical shock, credit could grind higher over the slower summer months.
Conditions could deteriorate further out. The current fundamental health of the broader fixed income market may help keep defaults at more manageable levels, but they are expected to rise from current levels.19 Rising credit stress and the potential for slower growth could eventually push credits spreads above current levels. While mindful of these headwinds, a glance at corporate balance sheets highlights leverage at decade lows and interest coverage, while deteriorating, still close to a four-year high.20
Ongoing refinancing efforts have whittled down the 2023 loan maturities, but the wall steepens after that. Those unable to refinance in the capital market given the current aversion to lower rated credits may instead turn to other markets, including private credit, for refinancing options.
As defaults rise, loan and bond recovery rates have decreased in this cycle to 41.1% and 33.65% respectively, compared to their historical averages of 64.48% and 53.01%.21 We note, however, that recent bankruptcies have been focused in weaker sectors, which may be a driver for a lower recovery. We also believe that lender-on-lender violence actions, which might also reduce the overall recovery rate, will remain infrequent.
In an environment where multiples are unlikely to expand, we believe that driving value is increasingly going to come from assets where cash flow can grow. That means identifying sectors with secular tailwinds that drive growth beyond inflationary levels. We expect meaningful dispersion between issuers and sectors, and that larger companies in historically resilient sectors with lower leverage should outperform the market.
We believe this more challenging and volatile environment will lead to elevated performance dispersion across managers. Those with experience of previous downturns and an active investment strategy should, in our view, be better placed to identify the alpha opportunities amid the volatility.
HYBL Historical Asset Allocation
Source: Blackstone, as of June 30, 2023. Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.