2016 ETF & INVESTMENT OUTLOOK

Transcription

1 2016 ETF & INVESTMENT OUTLOOK Michael Arone, CFA, Chief Investment Strategist for US Intermediary Business Group David B. Mazza, Head of Research, SPDR ETFs and SSGA Funds Matthew Bartolini, CFA, Research Strategist, SPDR ETFs and SSGA Funds Jared Rowley, CFA, Research Strategist, SPDR ETFs and SSGA Funds Key Points In 2016, we expect continued low growth, subdued inflation and generally accommodative monetary policy. Risks are skewed to the downside as fragile markets could quickly turn volatile on a single bad data point or negative news event. In equities, we favor areas of growth with macro-economic tailwinds such as the Eurozone, Japan, and financial and consumer related sectors in the US. In fixed income, we favor taking a balanced approach with a mix of interest rate and credit sensitive sectors such as high yield and senior loans.

2 THE BIG PICTURE Investing in a Low and Slow Growth Environment Key Takeaways Our base case for 2016 is that investors should be prepared for more of the low and slow growth that has characterized the global economy since the financial crisis. That means in equities, we believe investors should look for pockets of opportunities and growth. Outside the US, tilting to the Eurozone and Japan where the accommodative and pro-growth macro currents provide the strongest tailwinds is ideal. For the US, a resilient consumer and a potential Federal Reserve rate hike should continue to support and fuel top and bottom line growth in consumer related and financial sectors. In fixed income, still-low government bond yields and the desire for protection from potentially rising rates mean investors may have to explore more credit- sensitive sectors including high yield, senior loans and convertibles. What worked in 2015? Looking at the relative performance of major asset classes (see Figure 1), some clear trends emerge: In US equities, investors favored large-cap stocks over small-cap names. In the style spectrum, investors paid up for growth as consumer cyclicals, technology and health care led the way, while some traditional value sectors such as energy had a tough year. In international stocks, investors clearly preferred developed markets as emerging economies continued to struggle on China worries, weak commodity prices and a strong US dollar. In fixed income, investors favored government bonds over corporate credit, and within corporates they favored investment grade over high yield, as concerns over the impact of falling oil prices weighed on the high yield market. Figure 1: Comparison of Major Asset Classes 2015 Performance Performance (%) Large Cap vs. Small Cap S&P 500 Index Russell 2000 Index Growth vs. Value Russell 1000 Growth Russell 1000 Value Developed vs. Emerging MSCI EAFE Index MSCI EM Index Gov t vs. Corporate US Treasuries IG Corporate Bonds Inv. Grade vs. High Yield IG Corporate Bonds High Yield Source: State Street Global Advisors, Bloomberg, as of November 24, Indices representing each respective asset class are as follows US Treasuries: Barclays U.S. Treasury Index, IG Corporate Bonds: Barclays U.S. Corporate Investment Grade Bond Index, High Yield: Barclays U.S. Corporate High Yield Bond Index. Past performance is not a guarantee of future results. The index returns are unmanaged and do not reflect the deduction of any fees or expenses. The index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. State Street Global Advisors 2

3 Setting the Scene for 2016 US Economy Figure 2: Labor and Housing Markets are Improving There are many unknowns as we head into 2016, such as the pace of potential Federal Reserve rate hikes, whether other central banks will unleash more quantitative easing (QE) and who will reside in the White House. However, there seems to be broad consensus on two issues: global growth is slowing and inflation remains subdued. US economic growth slowed to 2.1 percent in the third quarter after rising 3.9 percent in the second quarter. 1 M (Full Time Employment) M (Home Sales) Yet, there are still some reasons to be optimistic. The US consumer has been incredibly resilient, while job growth and the housing market are both trending in the right direction (see Figure 2). The unemployment rate has fallen to 5 percent, its lowest level since the financial crisis, with nonfarm payrolls rising at an average of more than 200,000 a month in With these favorable conditions in place, it s hard to argue the US will slip into recession. 110 Dec 2007 US Full Time Employment US New Home and Existing Home Sales Dec 2015 Source: State Street Global Advisors, Bloomberg, as of November 9, Fed Outlook Our view is that the Fed most likely raises rates by 25 basis points at the December 2015 meeting, which would be the first hike in nearly a decade. After a likely lift-off in December, we expect a series of four quarter-point rate hikes in Rising rates may result in capital losses for investors in US government bonds such as Treasuries, particularly in longer duration debt. At the same time, the low level of absolute rates makes credit-sensitive sectors more attractive. After a likely lift-off in December, we expect a series of four quarter-point rate hikes in What could increase market volatility in 2016? Further economic slowing and market dislocations in China A major slowdown in US earnings growth at a time when investors are questioning equity valuations US Presidential and Congressional elections Another debt flare-up in the Eurozone Escalating geopolitical tensions in the Middle East Therefore, in fixed income, we favor sectors beyond traditional bond benchmarks such as the Barclays U.S. Aggregate Bond Index. We think investors should consider fixed income areas that are more sensitive to credit conditions than to rising rates, such as senior loans, convertible securities and high yield. State Street Global Advisors 3

4 Eurozone: Gaining Momentum We think some of the best opportunities for developed markets might be outside the US, and we like the Eurozone in particular. We base our case for the Eurozone on continued accommodative monetary policy, encouraging fundamental growth trends and emerging stability in southern Europe. Following a double-dip recession in 2012, the Eurozone has gained traction and posted economic growth every quarter since the third quarter of 2013 (see Figure 3). We think some of the best opportunities for developed markets might be outside the US, and we like the Eurozone in particular. Figure 3: Eurozone Growth GDP Growth (%) 2.0 PMI Index Level 56 Also, Europe is a large net importer of commodities which have fallen 21 percent in and these lower input costs should improve European corporate profits. Additionally, the region s exporters have benefitted from the euro s weakness, while other positives include a pick-up in household consumption and retail sales. We project Eurozone GDP full-year growth of 1.4 percent in Looking ahead, we forecast 1.6 percent growth in Emerging Markets: Focus on Quality It was yet another disappointing year for developing markets with the MSCI Emerging Markets Index down about 8.0 percent so far in 2015 and on track to underperform the US for the third straight year. 4 Yet, we don t think investors should give up on this notoriously volatile asset class. Instead, they need to be selective and focus on quality, as decades of debtfueled growth have left many corporate balance sheets in poor condition. Furthermore, emerging markets return on equity a key metric for assessing shareholder value is now lower than that of developed markets for the first time in 13 years Dec 2012 Sep 2013 Eurozone YoY GDP Growth Jun 2014 Mar 2015 Sep 2015 Markit Eurozone Manufacturing PMI Index Source: State Street Global Advisors, Bloomberg, as of November 9, However, many emerging market countries have unveiled new fiscal and economic reforms aimed at fostering sustainable growth and boosting competitiveness. Therefore, a larger emphasis on companies with strong corporate governance, quality balance sheets and a high return on equity could provide tailwinds for an emerging market allocation. Emerging markets return on equity is now lower than that of developed markets for the first time in 13 years. State Street Global Advisors 4

5 WHAT THE FLOWS ARE TELLING US Key Takeaways Standing at $2.1 trillion with more than 1,800 funds, 6 the US ETF industry is on track for another record-setting year with about $196 billion of net inflows through the end of November Big picture, investors favored equity funds. In particular, currency hedged ETFs posted strong inflows in 2015 as investors in international developed equities looked for protection against a rising US dollar (see Figure 4). We also saw investors trying to time a bottom in the beleaguered energy sector and herding behavior in high yield ETFs with investors moving in and out of this category based on market and credit conditions. As for more nuanced flow trends, in US sectors, while there was bargain hunting in the beaten-down energy sector, investors paid up for growth and performance in health care (see Figure 5). Also, investors avoided rate-sensitive sectors, including utilities and financials, although we did see the financial sector attract a significant $4 billion over the last six months of the year due to increased expectations for a Fed rate hike. 8 Finally, in fixed income, investors favored core aggregate funds and government debt, followed by investment-grade and high yield corporate bonds (see Figure 6). For the most part, investors didn t venture too far outside their comfort zone in fixed income ETFs, sticking to sectors in the Barclays U.S. Aggregate Bond Index rather than more non-traditional sectors such as senior loans and convertibles. While there was bargain hunting in the beaten-down energy sector, investors paid up for growth and performance in health care. Figure 4: Equity Fund Flows by Region Billions ($) Currency Hedged Int l Region US Int l Single Country Int l Broad Global Source: State Street Global Advisors, Bloomberg, as of November 24, Figure 5: US Equity Sector Fund Flows Billions ($) Industrials Utilities Consumer Staples Telecom Health Care Energy Consumer Discretionary Technology Materials Source: State Street Global Advisors, Bloomberg, as of November 24, State Street Global Advisors 5

6 Bottom Fishing in Energy Although energy ETFs attracted the second-highest flows after the white-hot health care sector, it was a tough year for the energy sector in terms of performance, with the S&P Energy Select Sector Index down 20 percent for the 12 months ending in October. 9 Focusing on the largest energy sector ETF, the Energy Select Sector SPDR Fund (XLE), we see that the flows this year reflect actual buying of the ETF, rather than short positioning (see Figure 7). This suggests that investors are indeed positioning for a bottom in the energy sector. Figure 6: Fixed Income Sector Flows Billions ($) Currency Hedged ETFs: Separating the Signal from the Noise While currency hedged ETFs amassed nearly $47 billion through the first 11 months of the year for a more than 200 percent increase from year-end 2014, about 75 percent of these assets came into the funds in the first four months of the year, with over $11 billion in March alone. 10 In the same four-month span, the US dollar strengthened 5 percent, nearly half of its entire 2015 appreciation. So while total asset flows are significant, the trend into the currency hedged space was the strongest in the first quarter when the European Central Bank (ECB) moved the currency markets with the implementation of its QE program of buying 60 billion euros of bonds a month. With the Fed on track to raise rates and the ECB hinting at further stimulus, this trend may come back into fashion. High Yield Herding With $4 billion of high yield ETF fund flows this year (see Figure 6), the speculative grade bond segment is poised to finish 2015 in the black, unless there is a major shift in sentiment. Of course, if the past is any prelude, this could indeed occur. As of the end of September, the category actually had year-to-date outflows of close to $250 million as high yield credit spreads widened 151 basis points over their five-year average. However, since the end of September, nearly $5 billion has rushed into the high yield category as spreads tightened 83 basis points Aggregate Government IG Corp Preferred Figure 7: Energy Select Sector SPDR Fund (XLE) Flows vs. Short Interest Fund Flows ($B) Short Interest Ratio (%) June 2014 High Yield Corp Municipals Inflation Protected Oct 2014 Feb 2015 Mortgage-Backed Asset-Backed Convertible Source: State Street Global Advisors, Bloomberg, as of November 24, Jun 2015 XLE Fund Flow Accumulation Source: State Street Global Advisors, Bloomberg, as of November 9, XLE Short Interest over Shares Outstanding Ratio Oct State Street Global Advisors 6

7 ETF IMPLEMENTATION IDEAS Key Takeaways Our base case is that investors should be prepared for a challenging low and slow scenario for global growth. We don t think the growth story is over or that a bear market is imminent, but investors may need to be more selective. Rather than buy the equities market with broad exposures, investors could target specific regions, sectors and industries. In fixed income, we favor the more creditsensitive areas of the bond markets for yield and some potential rising rate protection. Equities: Go Where the Growth Is In the US, we favor sector and industry investing to take advantage of fundamental trends in the economy and macro environment, such as earnings momentum and rising rates. We don t think the growth story is over or that a bear market is imminent, but investors may need to be more selective. Financial stocks and related banking sub-industries including regional banks have historically benefited from rising rates and a strengthening economy. The early part of the tightening cycle is especially constructive, as higher rates create more room for banks to increase the margins on their loans without stifling demand. Also, banks are generally more willing to lend against a backdrop of improving economic conditions. So, to the degree the Fed s moves reflect its confidence in the economy, we d expect lending activity to respond in kind. KRE SPDR S&P Regional Banking ETF As the economy continues to gain steam and consumer confidence trends higher, investors should consider the consumer discretionary sector to add an element of growth in a slow growth macro-driven world. Consumer discretionary firms should benefit from this increased spending and confidence as lower energy costs and a decline in import prices translate into fatter wallets for consumers. Earnings estimates reflect this macro oriented growth backdrop, as discretionary is projected to have the highest growth rate of any sector in Additionally, we believe homebuilders and the more discretionary housing related industries are attractive due to an improving employment picture and increasing household spending. With home sales reaching levels not seen since 2007 and homebuilder sentiment at decade long highs, this theme of a stronger housing market should continue to be well supported. 13 XHB SPDR S&P Homebuilders ETF Investors looking to further overweight market segments with potentially higher earnings and revenue growth should consider the health care and technology sectors. In the third quarter, these two segments registered healthy upside earnings revisions, with over 80 percent of firms beating estimates. 14 We feel future top and bottom line growth has the potential to be fueled by the desire of US consumers and businesses to restrict additional marginal spending to must have items. s XLK Technology Select Sector SPDR Fund XLV Health Care Select Sector SPDR Fund In terms of equity regions, we think the Eurozone is attractive due to continued ECB stimulus, downward pressure on the euro, improving lending conditions and investors looking for yield in equities due to extremely low or even negative bond yields. In particular, a depreciating euro versus the US dollar is supportive for the Eurozone as constituents in the EURO STOXX 50 Index derive 60 percent or more of their sales overseas. 15 FEZ SPDR EURO STOXX 50 ETF State Street Global Advisors 7

8 Looking to Japan, the Bank of Japan s commitment to increasing inflation and fueling growth remains one of the arrows in the quiver of Abenomics. A second arrow is a focus on creating shareholder value. Prime Minister Shinzo Abe s paramount emphasis on shareholder returns and improving corporate performance has made return on equity a focus of Japanese firms. Screening for these companies, which also do not trade at expensive multiples, is one way to access the growth engine of Japan. QJPN SPDR MSCI Japan Quality Mix ETF Despite the underperformance of emerging markets in recent years, we still think this asset class warrants an allocation. As discussed earlier, the tide appears to be turning for emerging markets in terms of reform. Many nations are enacting rules and reforms that are aimed at improving corporate governance, with a focus on increasing the quality of balance sheets and other growth measures to support their economies. A smart beta approach focused on companies with these pre-existing traits may lower the volatility of investing in emerging markets, and provide a compelling alternative to a market cap-weighted portfolio. QEMM SPDR MSCI Emerging Markets Quality Mix ETF Fixed Income: Navigate Rising Rates and Still-Low Yields We believe today s diversified fixed income portfolio requires more than a simple mix of US Treasuries, corporate debt and high-quality structured credit. Meanwhile, predicting the path of interest rates has proven to be an extremely difficult, if not impossible, task for investors. Therefore, an active core fixed income strategy with experienced managers may play a critical role in a portfolio by seeking to provide stability, diversification and income. Investors seeking an actively managed core solution for their fixed income portfolio can consider SPDR DoubleLine Total Return Tactical ETF (TOTL). This active ETF mixes traditional interest rate-sensitive sectors with non-traditional sectors in seeking to maximize total return over a full market cycle. These more credit-sensitive sectors include non-agency mortgage-backed securities, high yield and emerging market bonds, bank loans and collateralized loan obligations. With TOTL, investors can rely on DoubleLine Capital s expertise to navigate rising rates by allocating across multiple bond subsectors and applying individual security selection to potentially deliver alpha. TOTL SPDR DoubleLine Total Return Tactical ETF By further diversifying away from more traditional, rate-sensitive sectors, investors can construct flexible and customized portfolios for a rising rate environment. For investors seeking additional income at low levels of duration, and who are able to withstand a higher level of credit risk, senior loans may be an attractive choice. By further diversifying portfolios away from more traditional, rate-sensitive sectors, investors can construct flexible and customized portfolios for a rising rate environment still characterized by low yields. For a senior loan allocation, we prefer an active management approach to exploit potential market inefficiencies through security selection. SRLN SPDR Blackstone / GSO Senior Loan ETF State Street Global Advisors 8

9 High-yield corporate bonds are another area that investors can explore for income outside investment-grade bonds. High yield bonds can be a fixed income portfolio diversifier due to their relatively low correlation to the Barclays U.S. Aggregate Bond Index. High yield bonds could potentially provide an attractive balance of rising rate protection and yield, although there is no free lunch as these exposures do contain an elevated level of credit risk. JNK SPDR Barclays High Yield Bond ETF We also like convertible securities as potential additions to fixed income portfolios for their diversification benefits and other characteristics. Based on the profile of convertible security issuers, which tends to lean toward more growth oriented sectors such as technology and consumer discretionary, a convertible allocation features a cyclical growth equity component with a bond floor that s useful if the issuer s prospects go south. This profile typically lends itself well to a rising rate environment that is driven by economic improvements, such as strong labor growth and robust domestic demand. In fact, convertible securities have had strong positive relative returns during previous periods of increasing rates. 16 s US Sectors and Industries KRE SPDR S&P Regional Banking ETF XHB SPDR S&P Homebuilders ETF XLV Health Care Select Sector SPDR Fund XLK Technology Select Sector SPDR Fund International Equities FEZ SPDR EURO STOXX 50 ETF QEMM SPDR MSCI Emerging Markets Quality Mix ETF QJPN SPDR MSCI Japan Quality Mix ETF Fixed Income TOTL SPDR DoubleLine Total Return Tactical ETF SRLN SPDR Blackstone / GSO Senior Loan ETF JNK SPDR Barclays High Yield Bond ETF CWB SPDR Barclays Convertible Securities ETF CWB SPDR Barclays Convertible Securities ETF 1 U.S. Department of Commerce, as of November 24, 2015, third quarter 2015 GDP is second estimate. 2 Source: U.S. Bureau of Labor Statistics, as of November 6, Bloomberg Commodity Index as of November 12, Bloomberg, as of November 4, US equity market performance based on S&P 500 Index. 5 Based on the MSCI World Index and the MSCI Emerging Markets Index. Source: Bloomberg, as of October 30, Bloomberg, as of November 24, Bloomberg, State Street Global Advisors, as of November 24, Bloomberg, State Street Global Advisors, as of November 24, S&P Dow Jones Indices, data as of October 30, Bloomberg, State Street Global Advisors, as of October 30, Bloomberg, State Street Global Advisors, as of November 10, FactSet, State Street Global Advisors, as of November 13, Home Sales as measured by US New One Family Houses and US Existing Home Sales, as of September 15, 2015, per US Census Bureau. Homebuilder sentiment as measured by National Association of Home Builders/Wells Fargo Index, as of September 16, Bloomberg, as of November 12, Bloomberg, State Street Global Advisors, as of October 30, FactSet, as of July 31, Barclays Convertibles Bond > 500M Face Index average monthly return during periods of increasing interest rates since 2004 (last time Fed raised rates) is 1.71%, Barclays U.S. Aggregate Bond Index -1.58% per FactSet. State Street Global Advisors 9

10 DEFINITIONS Abenomics Refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as prime minister of Japan. Abenomics is based upon three arrows of fiscal stimulus, monetary easing and structural reforms. Barclays U.S. 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, Mortgagebacked bonds, corporate bonds and a small amount of foreign bonds traded in the US. Bank Loans Bank loans, or leveraged loans, are syndicated loans made to less-than-investment-grade companies, generally rated below BBB-/Baa3. 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. Basis Point One hundredth of one percent, or 0.01%. Convertible Bonds Hybrid securities that combine elements of stocks and bonds. Convertible bonds pay a periodic fixed amount as a coupon payment, and convertible bond covenants specify the price at which they can be converted into common stock. Correlation The historical tendency of two investments to move together. Investors often combine investments with low correlations to diversify portfolios. Credit Spreads The spread between Treasury securities and non-treasury securities that are identical in all respects except for quality rating. Currency Hedged Funds An investment fund with a financial contract that allows the fund s currency exposure to be hedged from fluctuations of foreign currencies. 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. Double-Dip Recession A double-dip recession refers to a recession, followed by short recovery, followed by another recession. Specifically, a double-dip recession refers to gross domestic product (GDP) growth sliding back to negative after a quarter or two of positive growth. 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. Earnings The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings typically refer to aftertax net income. Earnings Per Share (EPS) A profitability measure that is calculated by dividing a company s net income by the number of shares outstanding. Euro STOXX 50 Index A blue-chip index for the Eurozone, providing a representation of super-sector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries. 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. 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 twoto five-year term to maturity. State Street Global Advisors 10

11 Gross Domestic Product (GDP) The monetary value of all the finished goods and services produced within a country s borders in a specific time period. High Yield Corporate Bonds Corporate debt with generally lower credit ratings and higher yields than investment-grade corporate bonds. Inflation Rising prices for goods and services that erodes consumers purchasing power. M&A Activity Mergers and acquisitions. Industries that are experiencing M&A can see rising stock profits in smaller companies that are acquisition targets. Macro Trends Overarching economic forces on financial markets such as the movement of interest rates, inflation and changes in employment. Monetary Policy The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. MSCI Emerging Markets Index A benchmark that captures large- and mid-cap representation across 23 emerging markets countries. With 834 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Non-Agency Mortgage-Backed Securities, or MBS Groups of mortgage loans that are repackaged and sold to investors who earn their collective income streams. Nonagency MBS are repacked not by government agencies such as Fannie Mae or Freddie Mac, but by private financial institutions, such as banks. Nonfarm Payrolls The monthly data series produced by the US Department of Labor measuring the amount of jobs added outside of the agricultural sector. It is widely considered to be the single most important data series for investors to gauge the health of the economy and markets. Price-to-Earnings Multiples, or P/E Ratio A valuation metric that uses the ratio of the company s current stock price versus its earnings per share. Profit Margins Expressed as a percentage and, in effect, measures how much out of every dollar of sales a company actually keeps in earnings. Quantitative Easing (QE) An extraordinary monetary policy measure in which a central bank buys government fixed-income securities to lower interest rates, encourage borrowing and stimulate economic activity. Recession A contraction in economic activity lasting longer than a few months. S&P 500 Index A benchmark composed of five hundred (500) selected stocks, all of which are listed on national stock exchanges and spanning more than 25 separate industry groups. S&P Energy Select Sector Index The Energy Select Sector Index is a benchmark of the GICS energy sector companies from the following industries: oil, gas & consumable fuels and energy equipment and services. Sector Investing Investing into one or more sectors of the economy such as financials, energy or health care. Senior Loans Floating-rate debt issued by corporations and backed by collateral such as real estate or other assets. Styles The investment approach or objectives used to make choices in the selection of securities for a portfolio, with the most common being value and growth for equities. US Treasury Bonds Debt obligations of the US government that pay an interest rate to the owner. Volatility The tendency of a market index or security to jump around in price. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to greater potential for losses. Yield The income produced by an investment, typically calculated as the interest received annually divided by the investment s price. State Street Global Advisors 11

12 ssga.com spdrs.com For public use. State Street Global Advisors One Lincoln Street, Boston, MA T: 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 November 18, 2015 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. Hedging involves taking offsetting positions intended to reduce the volatility of an asset. If the hedging position behaves differently than expected, the volatility of the strategy as a whole may increase and even exceed the volatility of the asset being hedged. 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. Counterparty risk to a derivative or other transaction is a risk based on whether each party will be able or unable to honor its contractual obligations. If a party does not meet its obligations, the Fund will be subject to losses or unable to realize gains. Risks associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions. Concentrated investments in a particular industry may be more vulnerable to adverse changes in that industry or the market as a whole. A value style of investing emphasizes undervalued companies with characteristics for improved valuations. This style of investing is subject to the risk that the valuations never improve or that the returns on value equity securities are less than returns on other styles of investing or the overall stock market. Although subject to the risks of common stocks, low volatility stocks are seen as having a lower risk profile than the overall markets. However, a fund that invests in low volatility stocks may not produce investment exposure that has lower variability to changes in such stocks price levels. A quality style of investing emphasizes companies with high returns, stable earnings, and low financial leverage. This style of investing is subject to the risk that the past performance of these companies does not continue or that the returns on quality equity securities are less than returns on other styles of investing or the overall stock market. Foreign investments involve greater risks than US investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets. Foreign investments involve greater risks than US investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets. 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. 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. 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. Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. Select Sector SPDR Funds bear a higher level of risk than more broadly diversified funds. Derivative investments may involve risks such as potential illiquidity of the markets and additional risk of loss of principal. 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. Investments in small/mid-sized companies may involve greater risks than in those of larger, better known companies. Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations. 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 commodities entail significant risk and is not appropriate for all investors. Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates. State Street Global Advisors 12

13 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. Barclays is a trademark of Barclays, Inc. and has been licensed for use in connection with the listing and trading of the SPDR Barclays ETFs. SPDR Barclays ETFs are not sponsored by, endorsed, sold or promoted by Barclays, Inc. and Barclays makes no representation regarding the advisability of investing in them. 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. ALPS Distributors, Inc., a registered broker-dealer, is distributor for SPDR S&P 500, SPDR S&P MidCap 400 and SPDR Dow Jones Industrial Average, and all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc. is distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Markets, LLC. Distributor: State Street Global Markets, LLC is the distributor for all registered products on behalf of the advisor. SSGA Funds Management has retained GSO Capital Partners, & DoubleLine Capital LP as the sub-advisor. DoubleLine is a registered trademark of DoubleLine Capital LP. 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 or visit spdrs.com Not FDIC Insured No Bank Guarantee May Lose Value State Street Global Advisors 2015 State Street Corporation. All Rights Reserved. ID5628-IBG Exp. Date: 12/31/2016 IBG.EIO.1115 SSL000643