ACTIVELY MANAGED FIXED INCOME
Intended to meet the basic needs of why investors hold bonds.
At its core, a fixed income portfolio should seek to provide income, diversification and stability against riskier assets like stocks. With uncertainty over the path of interest rates remaining high and difficult for investors to predict, an actively managed core fixed income strategy may play a critical role in a portfolio by seeking to provide stability, diversification and income.
TOTL SPDR® DoubleLine® Total Return Tactical ETF
An exposure that seeks to capture trends or enhance diversification around the core.
For investors looking for income in the more credit sensitive areas of their portfolios, senior loans can be a compelling choice as they are more senior in the capital structure than traditional high yield — a potential benefit in the late stages of the credit cycle. For a senior loan allocation, active management may help exploit potential market inefficiencies through sector and security selection.
SRLN SPDR® Blackstone / GSO Senior Loan ETF
FLOATING RATE SECURITIES
An exposure to potentially mitigate downside risk in an uncertain market.
For short-term liquidity needs and potential risk mitigation, floating rate investment grade notes may provide some yield, and lower duration risk than fixed-rate exposures. There are also potential diversification benefits due to low historical correlations to traditional fixed income asset classes, with less sensitivity to rising rates.
FLRN SPDR® Bloomberg Barclays Investment Grade Floating Rate ETF
The Agg Misses the ‘Core’ Mark
With still low yields combined with elevated duration and insufficient sector diversification, the aging Bloomberg Barclays US Bond Aggregate Index (‘the Agg’) no longer meets the needs of a core fixed income allocation. Even as yields have risen, income potential remains low (see Figure 1). Stability is also in question, as demonstrated by the significant drawdown and spike in volatility experienced post-election. With uncertainty set to persist, investors likely won’t be able to tolerate such reactions and expect to meet their objectives.
A Potential Solution
Active Core Fixed Income from DoubleLine Capital
Investors can look to the experienced management team at DoubleLine Capital to help them steer the ship through this uncertain macro environment, by considering the SPDR DoubleLine Total Return Tactical ETF (TOTL). By virtue of allocating to a more expanded array of bond sectors relative to the Agg, TOTL may be more effective in delivering the diversification, income and stability which investors seek.
Generating Income at a Reasonable Risk
The need for income generation remains as real as ever, but uncertain monetary, and now fiscal, policy has created a challenging environment. With this backdrop, credit spreads may widen if the market takes a more risk off tone and in such an event, senior loans may outperform high yield bonds. As shown in Figure 3, since 1994, in months when credit spreads widened senior loans have outperformed high yield bonds by an average of 0.59%, with the potential benefits of yield preservation being most pronounced in more severe months.
A Potential Solution
An Active Approach to Senior Loans from Blackstone/GSO
A passive exposure to senior loans will simply mirror the size and liquidity preference of an index without concern for credit quality. Given this, investors should seek a more judicious approach in this space and consider the actively managed SPDR Blackstone/GSO Senior Loan ETF (SRLN). With 2016 delivering the highest number of defaults in a decade and the Fed signaling three rate hikes in 2017, now is not the time to compromise on quality in the high yield space. As shown below, active management allows SRLN to maintain a tighter credit quality, as they are not forced to buy low quality loans which a passive exposure would need to hold to replicate its benchmark.
Seeking Stability with Income
Not all short duration bonds are created alike. In fact, fixed rate short duration bonds have still witnessed declines when rates rise. To mitigate duration risk without limiting income potential in a rising rate environment, investors may consider LIBOR tethered floating rate notes, which have benefited from tailwinds, as LIBOR has spiked 48% in 2016 and 3% after the election results were known. So while the Bloomberg Barclays US Corporate 1-5 years Index lost -0.72% in the five days after the election during the ‘Trump Tantrum’, a measure of investment grade floating rate notes was up 0.05%.
A Potential Solution
Floating Rate Securities for a Bond Ballast with Rising Income Potential
One potential means of mitigating uncertainty in short-term rates is the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN), which seeks to track an index of investment grade rated floating rate notes with maturities less than five years. As shown in Figure 6, over the last 22 years, when the 2 year yield increased in a given month, the return on a 1-5 year slice of the fixed rate corporate bond market declined by 0.09%, while investment grade floating rate notes in the 5 year and below space increased by 0.29%. This asset class can act as a ballast and still provide income with yields on floating rate notes over 1.3%.1
1 Bloomberg Finance LP as of 12/22/2016.
Bloomberg Barclays US Aggregate Bond Index A commonly used benchmark for determining the relative performance of bond or fixed income portfolios. The index includes Treasury, Government agency bonds, Mortgage-backed bonds, corporate bonds and a small amount of foreign bonds traded in the US.
Bloomberg Barclays US Aggregate Credit The index represents publicly issued US corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. The index includes both corporate and non-corporate sectors.
Bank Loans Bank loans, or leveraged loans, are syndicated loans made to less-than-investment-grade companies, generally rated below BBB-/Baa3 by S&P, Fitch and Moody’s. Their below-investment-grade ratings make them similar to high-yield bonds. The vast majority of loans trading in the secondary market are “leveraged,” senior secured, fully-funded term loans.
Bloomberg Barclays US Dollar Floating Rate Note <5 Years Index Consists of debt instruments that pay a variable coupon rate, a majority of which are based on the 3-month LIBOR, with a fixed spread. The Index may include US registered, dollar denominated bonds of non-U.S. corporations, governments and supranational entities.
Bloomberg Barclays US Corporate 1-5 Year Index Designed to measure the performance of US corporate bonds that have a maturity of greater than or equal to 1 year and less than 5 years.
Bloomberg Barclays 1-5 Year U.S. Treasury Bond Index Measures the performance of US Treasury securities that have a remaining maturity of at least one year and less than five years.
Bloomberg US Treasury Bond Index A rules-based, market-value weighted index engineered to measure the performance and characteristics of fixed rate coupon US Treasuries which have a maturity greater than 12 months.
Basis Point One hundredth of one percent, or 0.01%.
Correlation The historical tendency of two investments to move together. Investors often combine investments with low correlations to diversify portfolios.
Diversification A strategy of combining a broad mix of investments and asset classes to potentially limit risk, although diversification does not guarantee protection from a loss in falling markets.
Duration A commonly used measure, expressed in years, that measures the sensitivity of the price of a bond or a fixed-income portfolio to changes in interest rates.
Exchange Traded Fund (ETF) An ETF is an open-ended fund that provides exposure to an underlying investment, usually an index. Like an individual stock, an ETF trades on an exchange throughout the day.
Fed Funds Rate The benchmark rate at which depository institutions lend reserve balances to others overnight.
Floating-Rate Exposures A debt instrument with a variable interest rate. Also known as a “floater,” a floating-rate note’s interest rate is tied to a benchmark such as the US Treasury bill rate, LIBOR, or the Fed funds or prime rate. Floaters are mainly issued by financial institutions and governments, and they typically have a two-to five-year term to maturity.
High Yield Corporate Bonds Corporate debt with generally lower credit ratings and higher yields than investment-grade corporate bonds.
iBoxx USD Liquid High Yield Index A rules-based benchmark comprised of liquid US dollar-denominated, high yield corporate bonds for sale in the US.
London Interbank Offered Rate (LIBOR) A benchmark for short term interest rates based on the rates that large London-based banks charge each other for loans.
S&P/LSTA U.S. Leveraged Loan 100 Index A benchmark designed to reflect the performance of the largest loans in the leveraged loan market. Senior Loans Floating-rate debt issued by corporations and backed by collateral such as real estate or other assets.
Senior Loans Floating-rate debt issued by corporations and backed by collateral such as real estate or other assets.
Standard Deviation A historical measure of the volatility of returns. If a portfolio has a high standard deviation, its returns have been volatile; a low standard deviation indicates returns have been less volatile. Standard Deviation is normally shown over a time period of 36 months, but the illustrations noted in this material may reflect a shorter time frame. This may not depict a true historical measure, and shouldn’t be relied upon as an accurate assessment of volatility.
US Treasury Bonds Debt obligations of the US government that pay an interest rate to the owner.
Yield The income produced by an investment, typically calculated as the interest received annually divided by the investment’s price.
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Important Risk Information
The views expressed in this material are the views of the SPDR ETFs and SSGA Funds Research Team through the period ended December 31, 2016 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
Foreign (non-U.S.) Securities may be subject to greater political, economic, environmental, credit and information risks. Foreign securities may be subject to higher volatility than U.S. securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.
While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The Fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments.
Non-diversified funds that focus on a relatively small number of securities tend to be more volatile than diversified funds and the market as a whole.
The values of debt securities may decrease as a result of many factors, including, by way of example, general market fluctuations; increases in interest rates; actual or perceived inability or unwillingness of issuers, guarantors or liquidity providers to make scheduled principal or interest payments; illiquidity in debt securities markets; and prepayments of principal, which often must be reinvested in obligations paying interest at lower rates.
Diversification does not ensure a profit or guarantee against loss.
Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
Investments in asset backed and mortgage backed securities are subject to prepayment risk which can limit the potential for gain during a declining interest rate environment and increases the potential for loss in a rising interest rate environment.
The funds presented herein have different investment objectives, costs and expenses. Each fund is managed by a different investment firm, and the performance of each fund will necessarily depend on the ability of their respective managers to select portfolio investments. These differences, among others, may result in significant disparity in the funds’ portfolio assets and performance. For further information on the funds, please review their respective prospectuses.
All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.
Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/ or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (“NAV”) of the Portfolio.
Investing in high yield securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
Actively managed funds do not seek to replicate the performance of a specified index. An actively managed fund may underperform its benchmark. An investment in the fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
These investments may have difficulty in liquidating an investment position without taking a significant discount from current market value, which can be a significant problem with certain lightly traded securities.
Standard & Poor’s®, S&P® and SPDR® are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
DoubleLine® is a registered trademark of DoubleLine Capital LP.
BLOOMBERG®, a trademark and service mark of Bloomberg Finance L.P. and its affiliates, and BARCLAYS®, a trademark and service mark of Barclays Bank Plc, have each been licensed for use in connection with the listing and trading of the SPDR Bloomberg Barclays ETFs.
Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs.
SSGA Funds Management has retained GSO Capital Partners, DoubleLine Capital LP as the sub-advisor. DoubleLine Capital LP and GSO Capital Partners are not affiliated with State Street Global Markets, LLC.
Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257 or visit spdrs.com. Read it carefully.
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