SPDR® Nuveen Municipal Bond ETF [MBND] – Q1 2023 Commentary
Curve positioning was a slight detractor from performance, whereas rating and sector allocation were positive contributors to performance. Security selection detracted from performance.
Performance
For the quarter, MBNE returned 1.91%, underperforming its benchmark by 49 basis points (bps). The Yield Curve steepened during the first quarter as interest rates declined by -0.54% on bonds due in 1 year, by -0.32% on bonds due in 7 to 10 years, by -0.35% on maturities of 14 to 16 years, and by -0.26% on maturities of 23 to 30 years.1 Despite the steepening of the yield curve, the decline in interest rates on all maturities enabled longer maturity ranges to outperform those with shorter maturities during the first quarter. As such, an overweighting to bonds maturing in less than 2 years hurt performance during the quarter, although that was partially offset by an overweighting in bonds maturing in greater than 17 years. Rating allocation was a slight positive contributor with an underweight in triple-A rated bonds driving this. Sector allocation was the largest positive contributor, with an underweight in state general obligation bonds, hospital bonds and an underweight in industrial development bonds driving this performance. Security selection was a detractor from performance, as cash exposure during market rallies hurt performance.
Fund Performance
| QTD (%) | YTD (%) | 1 Year (%) | 3 Year (%) | 5 Year (%) | 10 Year (%) | Since Inception Feb 03 2021 (%) | |
| NAV | 2.14 | 2.14 | -0.30 | - | - | - | -2.91 |
| Market Value | 1.91 | 1.91 | -0.36 | - | - | - | -2.94 |
| Bloomberg 3-15 Year Blend (2-17) Municipal Bond Index | 2.40 | 2.40 | 1.63 | 0.71 | 2.18 | 2.27 | -1.79 |
Inception date: February 3, 2021. Source: State Street Global Advisors, as of March 31, 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. It is not possible to Invest directly in an index. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling a fund. Index performance is not meant to represent that of any particular fund.
Gross Expense Ratio: 0.40% Net Expense Ratio: 0.40%
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
Municipal bond market performance improved during the first quarter, as yields declined in the face of capital market turmoil surrounding the banking sector. Low new issue supply and positive fund flows contributed to performance. Following a strong fourth quarter, municipals have positive momentum while offering an attractive entry point to investors.
The 10-year municipal-to-Treasury yield ratio varied during the quarter, as Treasury volatility did not pass directly through to municipals. The ratio ended the quarter at 65%, just tighter than the 68% year-end rate. This is still relatively rich compared to the long-term historical average of 85%. Conversely, the 30-year ratio was more stable and ended the quarter in line with historical averages at 90%, the same level where it started the year.2
Supply continued its slow pace to start the year, posting the lowest first quarter total since 2018. We saw net positive inflows during the quarter, however largely concentrated in January, and since then the market has been mostly neutral in reported funds. We anticipate as clarity surrounding fed action emerges, issuance should pick up slightly, and investors will come back into the municipal market in much greater force.
Portfolio Positioning and Outlook
During the quarter the portfolio invested cash and utilized a barbell approach, as the very short end of the municipal curve provides significantly better yield levels than further out on the curve, until you reach maturities of 12 years and more. Duration remained relatively in line with the benchmark throughout the quarter, and this was a slight detractor from performance. We anticipate duration to be beneficial overall to performance going forward, however we expect the volatile nature of the first quarter to continue this year as economic data and fed action weigh heavily on the fixed income market.
We see three main factors driving second quarter performance. First, the technical environment is likely to be supportive. Now that we have more clarity from the Fed on the path of interest rates, both investors and issuers may start to move off the sidelines. Muted issuance and strong demand are current tailwinds for the asset class, and inflows for both long duration and high yield have been positive year-to-date.
Second, credit fundamentals remain strong. Municipalities have record levels of tax collections and cash on hand. Credit conditions are solid, even in the face of interest rate volatility. Credit upgrades have been outpacing downgrades by nearly 3 to 1 based on full year 2022 data.3 And as essential service monopolistic providers, municipalities tend to do well in most economic environments.
Finally, long-term valuations are attractive compared to U.S. Treasuries and corporates. In the investment grade space, we like select longer-duration, high-quality bonds that we think are undervalued.
We believe our bottom-up, fundamental credit research process is well-positioned to take advantage of the opportunities we are seeing in the market today.