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  First Quater 2016 CEF Review
Posted Under: CEFs

After a difficult first six weeks of the year, most categories of the closed-end fund (CEF) marketplace rallied strongly during the second half of the first quarter. Indeed, the average CEF finished the quarter up 2.73% on a share price total return basis (According to Morningstar). At the start of the first quarter, many CEFs were negatively impacted by the significant sell-off in the global equity markets, decline in oil prices (which impacted the credit markets) and an overall palpable risk-off mentality that clearly existed among retail investors. However, by the middle of the quarter as the equity markets began to rally, oil prices firmed and some reassuring economic data was released, investors began to take advantage of the wider-than average historical discounts to net asset value (NAV) which existed for many CEFs and performance began to improve meaningfully during the last half of the quarter.

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Posted on Tuesday, April 26, 2016 @ 1:42 PM • Post Link Share: 
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  Are Expense Ratios a Dependable Predictor of Returns for Large Cap US Equity ETFs?
Posted Under: ETFs

In 2010, Morningstar published a study which argued that expense ratios are "the most dependable predictor of performance" for mutual funds.1; This study included roughly 5 years of mutual fund performance data, based upon which the authors recommended that investors focus on the cheapest 40% of mutual funds as a starting point in the due diligence process.  While some have sought to apply similar heuristics to ETFs, the evidence presented below pertaining to US large cap equity ETFs calls into question the sensibility of this application.  Over the past 5 years (as of 2/29/16), the cheapest large cap US equity ETFs have tended to underperform ETFs with higher expense ratios, with significantly fewer funds producing excess returns versus their respective S&P benchmarks.2

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¹"How Expense Ratios and Star Ratings Predict Success", Morningstar, 8/9/2010.
²Data obtained from Morningstar Direct. Including all ETFs from Large Cap Blend, Large Cap Value, and Large Cap Growth categories, with at least 5 years of performance history on 2/29/16 (80 ETFs).  This necessarily excludes ETFs that existed on 2/28/11, but have since become obsolete (23 ETFs).  While many of these ETFs would have been included in group #3, poor performance does not appear to be the primary cause of their obsolescence, in our opinion.  For the ETFs that would have been included in group #3 that accumulated at least 2 years of operating history (14 of 19 ETFs), 2 of 3 (67%) large cap value ETFs outperformed the S&P 500 Value Index in the 2 years prior to closing, 3 of 5 (60%) large cap growth ETFs outperformed the S&P 500 Growth Index in the 2 years prior to closing, and 1 of 6 (16.7%) outperformed the S&P 500 Index in the 2 years prior to closing.

Posted on Thursday, March 17, 2016 @ 2:48 PM • Post Link Share: 
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  Staying the Course with FVD
Posted Under: ETFs

Emotional decision-making ranks high on the list of obstacles that often prevent investors from achieving their financial goals and objectives.  The fear of incurring losses evokes a desire to sell after prices have dropped, while the fear of missing out on gains evokes a desire to buy after prices have risen.  Volatility acts as a catalyst to evoke emotional decision-making by creating a sense of urgency; investors may feel that decisions must be made in the heat of the moment, because prices are moving quickly!

In our opinion, emotional decision-making has been a root cause of many investor decisions to sell equity exchange-traded funds (ETFs) in 2016, as volatility has returned to the equity markets, accompanied by negative returns.  During the month of January, net outflows for US equity and sector ETFs totaled $14.1 billion1, as the average level of the CBOE Volatility Index surged to 23.7 (compared to an average of 16.7 in 2015)2, and the S&P 500 Index declined by 5%.

Such environments present a fresh opportunity to highlight the virtue of strategies designed to provide less volatile exposure to stocks, such as the First Trust Value Line® Dividend Index Fund (FVD).  In the context of a diversified3 investment portfolio, we believe this strategy may help investors "stay the course" and avoid making counterproductive emotional decisions.

FVD is an ETF that seeks to track the Value Line® Dividend Index.  This strategy builds upon the Value Line® SafetyTM Ranking System to select a portfolio of stocks traded on US exchanges with low volatility, strong balance sheets, and above average dividend yields.  The portfolio is equally weighted and rebalanced monthly.

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¹Source: Morningstar.
²Source: Bloomberg.
3While diversification is intended to spread risk among a greater number of holdings, this strategy does not guarantee a profit or protect against potential losses.

Posted on Monday, February 22, 2016 @ 2:32 PM • Post Link Share: 
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  Robust Growth for Municipal Bond ETFs in 2015
Posted Under: ETFs

Summary of 2015 ETF Flows and Trends1

  • US-listed ETF Assets stood at over $2.1 trillion on 12/31/15, a 6.7% increase from the end of 2014. Total estimated net inflows for the year were $245 billion, narrowly exceeding the record inflows of $242 billion from 2014.
  • ETF categories with the largest percentage increase in total assets in 2015 were Municipal Bond ETFs (+30%), Taxable Bond ETFs (+16.5%), and International Equity ETFs (+16.4%).
  • The strongest category of ETFs for net inflows in 2015 was International equity ETFs, with net inflows totaling over $105 billion. This was followed by Taxable Bond ETFs and US Equity ETFs, with net inflows totaling $58 billion and $52 billion, respectively.
  • The ETF category with the largest percentage decrease in assets was Commodity ETFs (-17.2%). Interestingly, this decline was primarily driven by poor performance, as the category actually had $772 million in net inflows for the year.

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1Based on Morningstar data, as of 12/31/15

Posted on Friday, February 05, 2016 @ 9:04 AM • Post Link Share: 
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  4th Quarter 2015 Municipal Market Performance and Highlights
Posted Under: Municipal
4th Quarter 2015 Municipal Market Performance and Highlights
  • The Barclays Municipal Bond Index returned 1.51% for the three months ended December 31, 2015, bringing the calendar year 2015 total return for the index to 3.30% (6.60% on a taxable-equivalent basis) (see footnote 1*). Tax-exempt municipal bonds had the highest risk adjusted returns of any asset class.  Municipal bond yields diverged from U.S. Treasuries. Even in the face of the current global economic malaise of slow growth, falling commodity prices, and volatile equity markets, the Federal Reserve ("Fed") finally raised its benchmark rate during the December meeting, the first rate hike since 2006. While the 10- and 30-year U.S. Treasury rates rose 21 basis points (bps) and 15 bps, respectively, to 2.27% and 3.02% from September 30, 2015 to December 31, 2015, 10- and 30-year AAA MMD yields decreased 11 bps and 22 bps, respectively, to 1.92% and 2.82% for the same period.
  • New issue supply was down dramatically in the fourth quarter due mainly to a substantial decline in refunding activity. While total new issue supply for 2015 was over 18% higher than 2014, growing from $337 billion to $398 billion, the fourth quarter of the year saw municipal bond issuance plummet 23% versus the same period in 2014. (Source: Barclays, SIFMA)
  • Mutual fund flows turned positive in the fourth quarter, totaling $8.1 billion for the quarter through December 23rd (most recent data available) with total 2015 net inflows of $12.3 billion as of December 23, 2015. (Source: Barclays, Investment Company Institute)
  • Municipal credit quality continued to improve. Municipal defaults have fallen in each of the past five years. State and local municipalities continue to see improvement in their revenues and balance sheets.

Click here for the full report.

Posted on Tuesday, February 02, 2016 @ 4:20 PM • Post Link Share: 
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  Senior Loan & High Yield Review – 4th Quarter 2015
Posted Under: Senior Loan
Market Review
The second half of 2015 was the most challenging credit market we have experienced since the global financial crisis. High-yield bonds returned  4.88% in the third quarter and -2.16% in the fourth quarter bringing the second half total return to -6.93% and the full year return to -4.61% (Exhibit 1). Senior loans were also impacted by the challenging market conditions, with a more modest decline than high-yield bonds but still down -2.10% in the fourth quarter and -3.42% in the second half of the year, according to Bloomberg. Moreover, for only the second time since the inception of the senior loan index in 1997,the market posted a negative return for the full calendar year with a total return of -0.69% (Exhibit 2).

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Posted on Friday, January 22, 2016 @ 4:04 PM • Post Link Share: 
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  The Return of Volatility and the Case for Earnings Quality
Posted Under: ETFs
A Snapshot of Q3 Flows and Trends

Despite healthy net inflows totaling $44.8 billion in Q3, in line with $45 billion of net inflows in Q2, US-listed exchange-traded fund (ETF) assets declined by $132 billion for the quarter, to $1.99 trillion.¹ This quarter-over-quarter decline—the first since Q2 of 2013—was caused primarily by a correction in global equities.  Nonetheless, domestic equity was the strongest category for the quarter, bringing in $22.8 billion in net inflows, marking the first quarter of positive net flows for the category in 2015.  The taxable bond category followed close behind with roughly $22 billion in net inflows, compared to less than $1 billion of net inflows for the previous quarter.  The alternative category also had a significant increase in net inflows at $4 billion, the majority of which came from leveraged long and inverse ETFs.  The largest reversal in Q3 came from the international equity category, which suffered $1.3 billion in net outflows, after leading all categories for net inflows for the previous quarter with $46.5 billion.  Sector equity ETFs also reversed course, with $2.6 billion in net outflows, compared to $2.4 billion of net inflows for the previous quarter.

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¹Morningstar Direct. Includes all US-listed exchange-traded funds, exchange-traded notes and other exchange-traded products. 
Posted on Wednesday, November 18, 2015 @ 8:18 AM • Post Link Share: 
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  Municipal Quarterly Update – 3rd Quarter 2015
Posted Under: Municipal
3rd Quarter 2015 Municipal Market Performance and Highlights
  • The Barclays Municipal Bond Index returned 1.65% for the three months ended September 30, 2015, bringing the year-to-date total return for the
  • index to 1.77%.
  • Municipal bond yields followed U.S. Treasuries lower, as global economic weakness, volatile equity markets, and the Federal Reserve's ("Fed")
  • September decision to postpone tightening drove a flight-to-quality rates rally. The 10- and 30-year U.S. Treasury rates fell 29 basis points (bps) and
  • 24 bps, respectively, to 2.06% and 2.87%.
  • New issue supply was lighter due to seasonal softness and declining refinancing volume as yields remained elevated into August versus those at the
  • start of the year. For the first nine months of the year, municipal bond issuance totaled $312.5 billion to outpace 2014 issuance during the same period
  • by 34.6%, well below the 44.9% year-over-year pace set during the first half of 2015. (Source: Barclays, SIFMA)
  • Net mutual fund flows remained modestly negative for a fifth consecutive month compressing total net inflows year-to-date through September 23,
  • 2015 to $4.5 billion from $6.8 billion at the end of June 2015. (Source: Barclays, Investment Company Institute)
  • Credit fundamentals remained healthy as first time defaults continued to trend lower and state and local government tax revenues surged higher.
Click here for the full report.
Posted on Friday, November 06, 2015 @ 8:01 AM • Post Link Share: 
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  Third Quater 2015 CEF Review
Posted Under: CEFs

After the second quarter, where the average closed-end fund (CEF) was lower by 3.70% on a share price total return basis, the third quarter was another difficult quarter, with the average CEF lower by 6.28% on a share price total return basis, according to Morningstar. Weakness in the global equity markets impacted equity CEFs with the average equity CEF lower by 15.14% on a share price total return basis. It is clear that an aversion to taking credit risk during the quarter negatively impacted many taxable fixed-income CEFs, with the average taxable fixed-income CEF lower by 4.60% on a share price total return basis. Municipal CEFs were a bright spot during the third quarter, with the average municipal CEF higher by 3.29% on a share price total return basis (Morningstar).

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Posted on Wednesday, October 28, 2015 @ 7:53 AM • Post Link Share: 
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  Senior Loan & High Yield Review
Posted Under: Senior Loan
Senior loan and high-yield bond returns were negative in the third quarter after posting a strong first half. With equities leading the way lower at -6.44% for the S&P 500 Index in the third quarter, high-yield bonds fell -4.88%, making this the most challenging quarter for high-yield bonds since the third quarter of 2011. Senior loans were down a much more modest -1.35% in the quarter.

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Posted on Thursday, October 22, 2015 @ 3:43 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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Diversify Your Short Duration Income Portfolio
Municipal Market Update - 2nd Quarter 2015
Questions to Ask Your "Smart Beta" ETF
Second Quater 2015 CEF Review
Senior Loan & High Yield Review
Limited Duration Closed-End Funds Performing Well in 2015
Municipal Quarterly Update – 1st Quarter 2015
Inside First Trust ETFs: A Snapshot of Q1 Flows and Trends
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