SPDR® SSGA Multi-Asset Real Return ETF (RLY) – Q3 2021 Commentary

During the third quarter of 2021, RLY returned -0.14% at NAV. The fund finished the quarter with overweights to natural resource equities, commodities and global infrastructure.

Driving underperformance was our overweight to global natural resource equities while underweights to real estate investment trusts (REITs) and US Treasury Inflation-Protected Securities (TIPS) also dented relative returns. Despite elevated inflation expectations, fears that economic growth has peaked and infrastructure uncertainty in the US weighed on natural resource equities which finished lower. Ongoing supply chain issues and product shortages have kept realized inflation high and combined with risk-off sentiment in September, US TIPS were buoyed and outperformed most real assets. We held a meaningful underweight to REITs, which our model disliked. However, REITs performed well, benefitting from strong service sector activity, positive price momentum and pent-up demand. An overweight to broad commodities was the biggest source of positive performance. A surge in energy prices driven by inflation fears and a global energy supply crunch supported commodities.

Fund Performance

Portfolio Allocations

Portfolio Positioning and Outlook
We continue to see a healthy backdrop for growth-oriented asset classes, albeit less so than the recent past. Broad measures of sentiment and risk indicators still look ok even if they are not landing in what we would consider a sweet spot for multiple expansion. Some of our business cycle indicators have decelerated but are not flashing any particular warning signs. The outlook for real assets is auspicious with economic growth expected to remain positive and logistical bottlenecks and supply shortages lasting into 2022 pressuring prices higher. We maintain a diversified growth asset exposure with healthy allocations to commodities, global infrastructure and global natural resource equities.

Our forecast for commodities remains constructive. Surging demand has made many commodities increasingly vulnerable to supply disruptions and demand increases. OPEC continues to draw down global inventories through cautious production control, while disruptions from hurricane Ida have moved US inventories to their tightest levels since 2018. Supply disruptions and robust demand for industrial metals have tightened fundamentals and continue to prop up their prices. All told, we continue to like commodities as we enter the final quarter of 2021, but like many other asset classes, some of the easier gains might just be behind us.

Infrastructure plans in the US have hit roadblocks, but our expectation is that an agreement will be reached by year end. Both global natural resource equities and infrastructure equities stand to benefit from infrastructure spending along with longer-term trends of decarbonization and other green energy thematics.

The outlook for agriculture is mixed, but risks appear to the downside as key drivers have moderated and the sector faces further headwinds with planting season upon us and prices elevated. The improved shape of the futures curves for agriculture is bullish for sustaining the higher prices, but improved production yields as a result of technology have historically led to abundant supplies. Further, near-term support for the US dollar could weigh on agriculture.

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