Commentary Q2 2021 SPDR® Smart Beta Dashboard

SPDR Americas Research Team

Over the past quarter, the cyclical factor rally that began over Smart Beta Spotlight six months ago lost steam as Value underperformed broad equities in the US, Developed ex-US, and Emerging Markets regions by as much as 5.8%.1 However, weak returns did not SPYV SPDR® Portfolio S&P 500® Value ETF stop investors from allocating to Value ETFs as these funds gathered more than $6.3 billion in assets, representing 10.9% of start-of-quarter AUM.2 This was second to Dividend funds, SPSM SPDR® Portfolio S&P 600TM which attracted more than $14 billion.3 Meanwhile, Quality Small Cap ETF reversed course from the subpar returns of Q4 2020 and Q1 2021 to outperform the broad market across all three regions between 33 basis points and 4.4%.4 Despite the QEFA SPDR® MSCI EAFE strong returns, Quality funds added just $1.6 billion in flows, StrategicFactorsSM ETF which ranks fourth in Q2 smart beta flows.5

The tug-of-war between the cyclical value and quality growth variant infections could support defensive factors. Investors factors is likely to persist as the economic recovery remains searching for relief from this “tug-of-war” might benefit from a uneven. While encouraging macroeconomic data (e.g. strong balanced, multi-factor approach that can potentially moderate retail sales, expansionary global manufacturing, increasing the gyrations of a broad beta strategy. job openings) bode well for cyclical factors, increasing delta

Figure 1: US-Listed Smart Beta Factor ETF Fund Flow Heatmap

In Millions ($) QTD Trailing 6 Mth Trailing 12 Mth QTD Trailing 6 Mth Trailing 12 Mth ($M) ($M) ($M) (% of AUM) (% of AUM) (% of AUM) Dividend 14,644 23,570 30,441 5.7% 10.3% 16.2% Low Volatility -4,842 -14,273 -22,781 -7.5% -19.8% -31.6% Momentum 117 613 2,571 0.5% 3.1% 17.1% Multi-Factor 432 -107 499 0.8% -0.2% 1.1% Quality 1,640 -430 1,188 4.0% -1.1% 3.6% Size 2,273 6,784 10,073 7.7% 30.0% 66.3% Value 6,376 12,796 16,018 10.9% 28.0% 47.3%

Source: SPDR Americas Research, Bloomberg Finance, L.P., as of 06/30/2021. Green highlights represent the top two segments and orange highlights represent the bottom two segments for a given period. Past performance is not a guarantee of future results. Chart is intended to be read vertically. 1 Bloomberg Finance, L.P., as of 06/30/2021. Past performance is not a reliable indicator of future performance. 2 SPDR Americas Research, Bloomberg Finance, L.P., as of 06/30/2021. 3 SPDR Americas Research, Bloomberg Finance, L.P., as of 06/30/2021. 4 Bloomberg Finance, L.P., as of 06/30/2021. Past performance is not a reliable indicator of future performance. 5 SPDR Americas Research, Bloomberg Finance, L.P., as of 06/30/2021.

1 Figure 2: MSCI Factor Index Excess Return by Region

Value stalled in Q2 across all regions, as it lagged broad US equities by 5.8%. Meanwhile, Momentum in Emerging Markets posted the strongest return over the past quarter across all regions and factors, outperforming market cap weighted by more than 9%.

Previous Quarter 1 Year

USA -2.1% Low Volatility -18.9% 1.8% Quality -3.6% -0.6% Size 7.6% -4.9% Dividend Yield -13.9% -1.5% Momentum -10.4% -5.8% Value 6.4%

Developed ex-US -0.1% Low Volatility -15.8%

Quality 4.4% 1.4% -1.9% Size -0.2%

Dividend Yield -1.9 -7.2% -2.2% Momentum -6.6% -1.4% Value 3.0%

Emerging Markets

Low Volatility -2.0% -14.0% 0.3% Quality 0.9% 1.9% Size -4.0% -2.7% Dividend Yield -10.2%

Momentum 9.1% 8.0%

Value -1.6% 10.3%

Source: Bloomberg Finance, L.P., as of 06/30/2021. MSCI Minimum Volatility, MSCI Enhanced Value, MSCI Quality, MSCI Equal Weighted, MSCI High Dividend Yield and MSCI Momentum indices within each region are used to represent regional factor performance. Excess return is calculated based off MSCI USA, MSCI EAFE, and MSCI Emerging Markets Indices respectively. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.Past performance is not a guarantee of future results.

2 Figure 3: MSCI World Factor Quarterly Performance Quilt Chart (%)

Quality was the only factor to beat the MSCI World Index in Q2, leading broad equities by 3%. Value was the worst performing factor after leading for the previous two quarters.

MSCI World Enhanced Value Index MSCI World Minimum Volatility Index MSCI World Equal Weighted Index MSCI World MSCI World Quality Index MSCI World High Dividend Yield Index MSCI World Momentum Index

2016 2017 2018 2019 2020 2021

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 5.29 8.29 6.44 7.26 7.08 2.84 3.53 7.87 -7.28 15.71 5.76 3.19 11.40 -14.47 21.98 11.21 18.04 13.52 10.73 1.86 7.92 5.05 6.05 7.02 0.06 2.31 6.99 -8.71 13.14 4.76 1.56 9.31 -15.31 19.61 9.24 17.31 6.14 7.74 0.92 6.53 4.20 4.84 6.83 -0.88 1.73 6.02 -13.42 12.48 4.00 1.09 8.56 -15.56 19.36 7.93 13.96 6.12 6.88 -0.32 6.38 4.03 4.61 5.57 -1.03 0.91 4.98 -13.72 11.61 3.95 0.53 8.14 -21.05 18.52 6.36 11.64 4.92 5.81 -1.09 5.91 3.36 4.43 5.51 -1.25 0.40 4.79 -13.88 10.59 3.10 0.26 7.10 -21.82 11.08 4.68 10.54 2.86 5.62 -1.21 5.57 3.20 4.40 4.44 -1.28 -0.23 3.57 -14.01 10.33 2.86 0.07 6.43 -25.89 11.05 3.14 10.43 1.23 4.14 -2.71 4.72 2.77 2.94 3.50 -3.15 -2.50 2.57 -15.33 8.94 -0.15 -0.23 3.02 -26.80 9.84 0.05 5.69 0.43 2.60

Source: Bloomberg Finance, L.P., as of 06/30/2021. Past performance is not a guarantee of future results.

Figure 4: Sector Over/Underweight vs. MSCI World Index (%)

Quality’s outperformance in Q2 is attributed to being most overweight Tech (+16%). Conversely, High Dividend Yield was most underweight Tech (-14%), which contributed to its weak performance over the same period.

Comm. Cons. Cons. Energy Financials Health Industrials Info. Materials Real Utilities Services Disc. Staples Care Tech. Estate MSCI World Minimum 4.55 -4.96 5.10 -3.11 -4.48 5.35 -1.70 -5.08 -0.41 0.04 4.68 Volatility Index MSCI World High -2.43 -6.67 12.73 -1.97 -0.04 8.39 -0.50 -14.05 2.14 -1.98 4.39 Dividend Yield Index MSCI World 1.96 0.52 -5.98 0.26 12.76 -9.02 2.56 0.75 1.07 -2.38 -2.50 Momentum Index MSCI World 2.10 -6.76 2.16 -3.16 -8.76 5.38 -0.02 16.15 -2.01 -2.40 -2.69 Quality Index MSCI World Equal -3.00 -0.83 0.15 -0.04 0.53 -2.08 5.32 -8.74 2.59 3.60 2.50 Weighted Index MSCI World Value -1.15 -1.74 0.28 2.79 12.43 -2.51 -0.19 -11.84 0.74 -0.12 1.31 Weighted Index

Source: Bloomberg Finance, L.P., as of 06/30/2021. Exposures are as of the date indicated, are subject to change and should not be relied upon as current thereafter. Green highlights represent the top three overweighted sectors orange highlights represent the bottom three underweighted sectors for a given index.

3 Figure 5: MSCI World Factor Q2 Daily Excess Return Correlations

Momentum has become less correlated to Quality in Q2, as the factor exposure shifts away from the Technology sector while adding Financials.

Value Quality Low Volatility Dividend Yield Size Momentum Value 1.00 — — — — — Quality -0.66 1.00 — — — — Low Volatility 0.32 0.02 1.00 — — — Dividend Yield 0.66 -0.38 0.75 1.00 — — Size 0.77 -0.76 0.30 0.50 1.00 — Momentum -0.59 0.25 -0.61 -0.75 -0.45 1.00

Source: Bloomberg Finance, L.P., as of 06/30/2021. Minimum Volatility, Value, Quality, Size, Dividend Yield and Momentum are represented by the MSCI World Minimum Volatility Index, MSCI World Enhanced Value Index, MSCI World Quality Index, MSCI World Equal Weighted Index, MSCI World High Dividend Yield Index and MSCI World Momentum Index. Correlation is calculated using daily excess returns of factor indices over the MSCI World Index. The three most negative correlations are shaded in orange. The three most positive correlations are shared in green.

Figure 6: MSCI USA Factor Index Beta Sensitivities to Macro Indicators

The flattening yield curve and declining breakeven rate have weighed on the performance of Value but provided tailwinds for Quality.

U.S. 10 Year Yield (36 Month) U.S. 10 Year — 2 Year Yield (36 Month) 10 Year Breakeven Inflation Rate

Value 0.29 1.55 2.42 Quality 0.18 -0.37 -0.41 Low Volatility 1.07 -1.02 0.65 Dividend Yield 0.90 -0.07 1.03 Size 0.02 0.83 1.09 Momentum -0.34 -1.38 -1.50

Source: Bloomberg Finance, L.P., as of 06/30/2021. Minimum Volatility, Value, Quality, Size, Dividend Yield and Momentum are represented by the MSCI USA Minimum Volatility Index, MSCI USA Enhanced Value Index, MSCI USA Quality Index, MSCI USA Equal Weighted Index, MSCI USA High Dividend Yield Index and MSCI USA Momentum Index. Beta sensitivity is calculated using monthly excess returns over the MSCI USA Index and monthly macro indicator data for the trailing 36-month period. Characteristics are as of the date indicated, are subject to change and should not be relied upon as current thereafter. The lowest five betas are shaded in orange. The highest five betas are shared in green.

4 ssga.com/etfs MSCI Emerging Market Index The MSCI MSCI USA Index The index is designed to same constituents as its the MSCI World Index Emerging Markets Index captures large and measure the performance of the large and mid but equally weight them. Information Classification: General mid-cap representation across 23 emerging cap segments of the US market. markets countries. With 834 constituents, the MSCI World High Dividend Yield Index The Glossary index covers approximately 85% of the free MSCI USA Minimum Volatility Index The MSCI World High Dividend Yield Index is based float-adjusted market capitalization in MSCI USA Minimum Volatility (USD) Index aims on the MSCI World Index, its parent index and Dividend Yield Factor A factor which screens each country. to reflect the performance characteristics of a includes large and mid-cap stocks across 23 for companies with a higher than average minimum variance strategy applied to the MSCI Developed Markets (DM) countries.* The index dividend yield relative to the broad market, and MSCI USA Enhanced Value Index The large and mid cap equity universe. The index is is designed to reflect the performance of which have demonstrated dividend MSCI USA Enhanced Value Index captures calculated by optimizing the MSCI USA Index, equities in the parent index (excluding REITs) sustainability and persistence. large and mid-cap representation across the its parent index, for the lowest absolute risk with higher dividend income and quality US equity markets exhibiting overall value (within a given set of constraints). Historically, characteristics than average dividend yields Excess Returns A security’s return minus style characteristics. The index is designed the index has shown lower beta and volatility that are both sustainable and persistent. The the return from another security in the same to represent the performance of securities characteristics relative to the MSCI World Index. index also applies quality screens and reviews time period. that exhibit higher value characteristics 12-month past performance to omit stocks with relative to their peers within the corresponding MSCI USA Quality Index The MSCI USA potentially deteriorating fundamentals that Low Volatility Factor Stocks seen as having GICS® sector. Quality Index is based on MSCI USA, its parent could force them to cut or reduce dividends. a lower risk profile than the overall markets. index. The index aims to capture the However, a portfolio comprised of low volatility MSCI USA Equal Weighted Index The MSCI performance of quality growth stocks by MSCI World Minimum Volatility Index The stocks may not produce investment exposure USA Equal Weighted Index include the same identifying stocks with high quality scores MSCI World Minimum Volatility (USD) Index that has lower variability to changes in such constituents as it’s the MSCI USA Index but based on three main fundamental variables: aims to reflect the performance characteristics stocks’ price levels. equally weight them. high return on equity (ROE), stable year-over- of a minimum variance strategy applied to the year earnings growth and low financial leverage. MSCI large and mid cap equity universe across Momentum Factor The tendency for a MSCI USA High Dividend Yield Index The 23 Developed Markets countries.* The index is security to maintain a certain direction of price MSCI World High Dividend Yield Index is based MSCI World Enhanced Value Index The MSCI calculated by optimizing the MSCI World Index, trajectory. This tendency is well documented in on the MSCI USA Index, its parent index and World Enhanced Value Index is based on the its parent index, for the lowest absolute risk academic research, which has made includes large and mid-cap stocks. The index is MSCI World Index, which includes large and (within a given set of constraints). Historically, “momentum” one of the six smart beta factors designed to reflect the performance of equities mid-cap stocks across 23 Developed Markets the index has shown lower beta and volatility that are systematically being isolated in in the parent index (excluding REITs) with higher (DM) countries.* The index is designed to characteristics relative to the MSCI World Index. new-generation strategic indexes. dividend income and quality characteristics represent the performance of securities that than average dividend yields that are both exhibit higher value characteristics relative MSCI World Quality Index The MSCI World MSCI EAFE Index An equities benchmark sustainable and persistent. The index also to their peers within the corresponding Quality Index is based on MSCI World, its parent that captures large- and mid-cap representation applies quality screens and reviews 12-month GICS® sector. index, which includes large and mid-cap stocks across 21 countries around past performance to omit stocks with across 23 Developed Market (DM) countries.* the world, excluding the US and . potentially deteriorating fundamentals that MSCI World Equal Weighted Index The The index aims to capture the performance of could force them to cut or reduce dividends. MSCI World Equal Weighted Index include the quality growth stocks by identifying stocks with

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