Insights

SPDR® SSGA Multi-Asset Real Return ETF (RLY) – Q2 2021 Commentary

During the second quarter of 2021, SPDR SSGA Multi-Asset Real Return ETF (RLY) finished up in absolute returns and outperformed its custom strategic benchmark. The fund finished the quarter with overweights to natural resource equities, commodities and global infrastructure.


Performance
Driving fund outperformance was our underweight to inflation-linked bonds and oveweight to core commodities. Our modest overweight to broad commodities throughout the quarter was underpinned by firm momentum and favorable curve dynamics, which helped to deliver alpha as oil prices moved steadily higher while other commodities exhibited mixed performance. US Treasury inflation-protected securities (TIPS) performed well early in the quarter, but stalled in May, coinciding with a rollover in market-based inflation expectations. Even though inflation-linked bonds delivered respectable performance in the second quarter, riskier assets continued to post very strong performance and our net underweight to the bonds was one of the biggest drivers of relative outperformance. On the negative side, an underweight to real estate investment trusts (REITs) hurt relative performance. We held a meaningful underweight to REITs as our model disliked the asset class. However, REITs continued to perform well as economies reopened and investors received more clarity on REIT cash flows.

Fund Performance

Portfolio Allocations

Portfolio Positioning and Outlook
The outlook for real assets appears constructive as realized inflation is set to remain higher while improved vaccine and mobility trends are set to unleash pent-up demand. Additionally, the US is discussing infrastructure spending that could top $4 trillion dollars, introducing further stimulus into the economy when prices are being pressured higher by the economic recovery. On that note, inflationary risks stand out as the most obvious pitfall to protracted progress in the months ahead.

We maintain a diversified growth asset exposure with healthy allocations to commodities, global infrastructure and global natural resource equities. Commodities are one of the most effective ways to protect against rising inflation. This should not be terribly surprising since many commodities are, at some level, the base ingredients for more complex and hedonically adjusted price indexes. And in this respect, our short-term views do align with a meaningful stake in raw commodities. Our view is partly informed by the baseline inflation risks but also draws upon strength in momentum indicators and favorable near-term curve dynamics. While we can’t fervently commit to an unambiguous upswing in inflation, we do see more prominent risks to the upside than we have for some time. Healthy consumer balance sheets and fading mobility restrictions should provide a tailwind for the service sector, potentially increasing the demand for energy. In addition to the increasing infrastructure plans in the US, infrastructure equities stand to benefit from longer-term trends of decarbonization and other green energy thematics. Global natural resource equities should also benefit from the aforementioned tailwinds.

We have liquidated our position in gold as technical indicators have been choppy, recently turning negative, and indicate poor price momentum for gold. While current levels of debt to GDP and negative real rates buttress the precious metal, recent US dollar strength dims the outlook for gold.

The outlook for agriculture may lead to limited price appreciation as key drivers of late 2020 and early 2021 have abated and the summer growing months unfold in Northern Hemisphere. The improved shape of the futures curves for agriculture, specifically grains, is bullish for sustaining the elevated prices that have been driven by increased demand, but improved production yields as a result of technology have historically led to abundant supplies. However, the potential for severe weather disruptions exist until the fall harvest is complete.

REITs are buoyed by better economic growth prospects and supportive risk appetite. Price momentum has been improving, but relatively poor earnings and sales estimates, combined with still weak fund flows, support our underweight to REITs.

Market Regime Forecasts
The Market Regime Indicator (MRI) employs a quantitative framework and forward-looking market indicators, including equity- and currency-implied volatility, as well as credit spreads, to identify the current market risk environment. Tracking risk appetite shifts in the market cycle helps frame tactical asset allocation and volatility targets.

A Look at the MRI

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