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ETF Strategist
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  Diversify Your Short Duration Income Portfolio
Posted Under: ETFs

As financial advisors prepare for the Federal Reserve (the "Fed") to begin raising interest rates for the first time since 2006, it may be a prudent time to consider shortening the duration of their clients' fixed-income portfolios.1 Considering the relatively low yields offered by long-term bonds, an interest rate increase of 1 or 2 percentage points could result in a price decline equivalent to multiple years of income. For example, as of 8/31/15, the yield-to- maturity for the Barclays US Aggregate Bond Index was 2.4%, with a modified duration of 5.6 years.2 This implies that for every 1% increase in interest rates, the price of the index could decline by roughly 5.6%.

The difficulty with shortening duration, however, is that short-term yields for investment grade bonds are currently too low to meet the income needs of many investors. As a result, financial advisors must determine whether lessening interest rate risk while accepting more credit risk is a worthwhile tradeoff, in order to attain a more desirable level of income. For example, while the First Trust Senior Loan Fund (FTSL) bears more credit risk than the Barclays US Aggregate Bond Index by investing in a portfolio of below-investment grade floating-rate senior bank loans, the fund has minimal interest rate risk with a weighted average effective duration of 0.84 years, while offering a 30-Day SEC Yield of 4.06%.3,4

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Posted on Wednesday, September 16, 2015 @ 1:46 PM • Post Link Share: 
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  Municipal Market Update - 2nd Quarter 2015
Posted Under: Municipal

During the first half of 2015, municipal bond total returns were distinctly modest. For the six months ended June 30, 2015, the Barclays Municipal Bond Index returned a slightly positive 0.11%. The Barclays Revenue Bond Index and Barclays High Yield (Non-Investment Grade) Index realized total returns of 0.17% and -1.92%, respectively.

Click here for the full report.

Posted on Tuesday, August 11, 2015 @ 2:17 PM • Post Link Share: 
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  Questions to Ask Your "Smart Beta" ETF
Posted Under: ETFs

Questions to Ask Your "Smart Beta" ETF
by Ryan O. Issakainen, CFA

One of the most common complaints we hear from investment advisors attempting to evaluate "smart beta" ETFs is that the category itself lacks cohesion.  ETFs employing a variety of different strategies, with a wide range of risks and objectives, have been given the "smart beta" label simply because they do not track traditional market-cap weighted benchmark indices.  Alternatively, we believe advisors are better off judging ETFs on the basis of their own underlying strategies, rather than attempting to treat "smart beta" ETFs as a category.  The following presents a few questions we believe investors should ask as they begin this process, using as a model First Trust's AlphaDEX family of ETFs, which is comprised of 41 funds with $20.9 billion in assets-under-management (as of 6/30/15).

What is the objective of the underlying strategy?
In order to judge how successful a strategy might be, we believe it's important to first identify what it's trying to accomplish.  So-called "smart beta" ETFs have a wide range of objectives, ranging from maximizing dividend income, to increasing or decreasing market risk, to seeking exposure to other specific characteristics.  The objective of the strategy employed by First Trust's AlphaDEX ETFs is to seek better risk-adjusted returns than traditional benchmark indices, while maintaining a relatively high degree of correlation to those benchmarks.

From what universe of stocks are potential holdings selected?
We believe it's important to know what sort of holdings a strategy might include.  On the one hand, a broad universe may produce certain unexpected exposures or biases; on the other hand, a narrow universe may limit the level of exposure to certain characteristics sought by a strategy.  The universe of stocks for each AlphaDEX strategy is established by the holdings of traditional benchmark indices.  For example, the universe of potential holdings for the First Trust Large Cap Core AlphaDEX Fund (FEX) is established by the S&P 500 Index.  This is intended to prevent each AlphaDEX strategy from "drifting" into other categories.

How are stocks selected?
While some strategies include all potential holdings from a given universe, others select a smaller group, based on a variety of characteristics.  The AlphaDEX strategy selects holdings based on a scoring model designed to favor certain factors that, when combined, have historically been associated with better risk-adjusted returns.

The AlphaDEX strategy scores "value" stocks based on three separate factors: price-to-book ratio, price-to-cash flow ratio, and return on assets.  The first two factors identify whether a stock is cheap or expensive compared to other stocks in the universe, relative to certain fundamental measures (book value and cash flow).  The model scores "cheap" stocks higher than "expensive" stocks in order to seek to capitalize on the so-called "value" anomaly, which is the tendency of cheap stocks to deliver better risk-adjusted returns—and expensive stocks to deliver worse risk-adjusted returns—than predicted by the efficient market hypothesis.  The third factor, return on assets, provides an indication of efficiency and balance sheet quality.  Its purpose in the model is to bias the strategy in favor higher quality stocks.

The AlphaDEX strategy scores "growth" stocks based on five separate factors: three-month price appreciation, six-month price appreciation, twelve-month price appreciation, one-year sales growth, and price-to-sales ratio.  The first three factors measure momentum over various time periods, scoring high momentum stocks better than low momentum stocks.  This is done to seek to capitalize on the so-called "momentum" anomaly, which is the tendency for stocks that have performed best in the recent past to outperform over the next three to twelve months.  In addition to momentum, the growth model includes one-year sales growth in order to favor stocks whose momentum is supported by underlying fundamental revenue growth.  Lastly, price-to-sales is included in order to deemphasize more expensive high-momentum stocks.

How are weightings assigned?
A variety of weighting methodologies have been applied to "smart beta" ETFs, ranging from equal-weighting to weightings based on certain fundamental characteristics, such as earnings or dividends.  The AlphaDEX strategy uses the scoring model described above to assign portfolio weightings which results in weighting higher scoring stocks over lower scoring stocks.

How often is the strategy reapplied and the portfolio rebalanced?
Many "smart beta" strategies have higher turnover and more frequent rebalancing than traditional market-cap weighted benchmark indices.  The AlphaDEX strategy is reapplied, and holdings are rebalanced, on a quarterly basis for domestic funds, and a semi-annual basis for international funds.  As stock prices and company fundamentals shift over time, we believe this is necessary in order for the strategy to continue favoring relatively cheap, high-quality value stocks, and reasonably priced, high-momentum growth stocks.
Of course, the questions listed above are meant only to be a starting point for those attempting to get their arms around a continually expanding and evolving universe of so called "smart beta" ETFs.  Beyond these questions are many others pertaining to how well the risks and objectives of different ETFs align with those of individual investors.  For these questions, we believe investment advisors should play an essential role, evaluating the function that each ETF provides in the context of a diversified investment portfolio, and overall financial plan.

You should consider a fund's investment objectives, risks, charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or visit www.ftportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about a fund. The prospectus or summary prospectus should be read carefully before investing.

A fund's return may not match the return of the index. Securities held by a fund will generally not be bought or sold in response to market fluctuations.

Investors buying or selling fund shares on the secondary market may incur brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell fund shares may receive less than the share's net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the funds by authorized participants, in very large creation/redemption units.

A fund's shares will change in value, and you could lose money by investing in a fund. One of the principal risks of investing in a fund is market risk. Market risk is the risk that a particular stock owned by a fund, fund shares or stocks in general may fall in value. There can be no assurance that a fund's investment objective will be achieved.

A fund may invest in securities issued by companies concentrated in a particular industry, sector or country. A fund may invest in small capitalization and mid capitalization companies. Such companies may experience greater price volatility than larger, more established companies.

An investment in a fund containing securities of non-U.S. issuers is subject to additional risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting non-U.S. issuers. These risks may be heightened for securities of companies located in, or with significant operations in, emerging market countries.

A fund may invest in depositary receipts which may be less liquid than the underlying shares in their primary trading market. A fund may effect a portion of creations and redemptions for cash, rather than in-kind securities. As a result, a fund may be less tax-efficient.
The funds are classified as "non-diversified" and may invest a relatively high percentage of their assets in a limited number of issuers. As a result, the funds may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers.

First Trust Advisors L.P. is the adviser to the funds. First Trust Advisors L.P. is an affiliate of First Trust Portfolios L.P., the funds' distributor.

AlphaDEX® is a registered trademark of First Trust Portfolios L.P. First Trust Portfolios L.P. has obtained a patent for the AlphaDEX® stock selection methodology from the United States Patent and Trademark Office.

Posted on Monday, July 27, 2015 @ 9:46 AM • Post Link Share: 
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  Second Quater 2015 CEF Review
Posted Under: CEFs
The second quarter was a difficult one for diversified closed-end fund (CEF) investors. According to Morningstar, the average CEF was lower by 3.70% on a share price total return basis. Most categories of the CEF marketplace experienced share price total return weakness during the second quarter and that is reflected in the fact that, according to Morningstar, all equity CEFs were lower by an average of 3.44%; all taxable fixed-income CEFs were down by an average of 3.40% and all municipal CEFs were lower by an average of 4.35%. While there are different reasons for the share price weakness depending on the specific category, in general the global increase in long-term interest rates during the quarter, coupled with volatile global equity markets (particularly during the last month of the second quarter), created a tough backdrop for many CEFs.

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Posted on Wednesday, July 22, 2015 @ 3:21 PM • Post Link Share: 
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  Senior Loan & High Yield Review
Posted Under: Senior Loan
Senior loans and high-yield bonds posted a strong first half of 2015, outperforming fixed-income instruments that are more rate sensitive as well as equities (see table on page 3). Much of this strong performance can be attributed to senior loans and high-yield bonds beginning the year at very attractive valuations, after a healthy bout of volatility in the back half of 2014. In addition, the strong relative performance has come as the rhetoric continues to build around the U.S. Federal Reserve (the "Fed") increasing interest rates later this year, which has served to pressure the returns of the more rate sensitive areas of fixed-income (investment grade corporate bonds, U.S. Treasuries, etc.).

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Posted on Tuesday, July 21, 2015 @ 9:20 AM • Post Link Share: 
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  Limited Duration Closed-End Funds Performing Well in 2015
Posted Under: CEFs
At the end of March I wrote about how, after a difficult 2014, senior loan closed-end funds (CEFs) were off to a strong start to the year in 2015.  Senior loan CEFs continue to perform well this year and are now up 6.93% (as of 5/21/15 according to Morningstar on a share price total return basis). Another category I continue to advocate diversified CEF investors have exposure to is limited duration CEFs. Similar to senior loan CEFs, limited duration CEFs had a disappointing year in 2014 rising on average only 0.56% on a share price total return basis, according to Morningstar. However, just as is the case with senior loan CEFs, performance has improved in 2015 for limited duration CEFs. Indeed, according to Morningstar, the average limited duration CEF is up 3.93% on a share price total return basis as of 5/21/15. In my opinion, there are likely two key reasons for the improved performance for limited duration CEFs so far in 2015 including:

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Posted on Wednesday, May 27, 2015 @ 11:46 AM • Post Link Share: 
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  Municipal Quarterly Update – 1st Quarter 2015
Posted Under: Municipal

Uncertainty abounded in the municipal bond market in the first quarter of 2015; likewise the same could be said of fixed income as a whole. The year began with market consensus believing rates would rise during the first quarter of 2015 in anticipation of possible Federal Reserve (Fed) tightening mid-year. Instead, weaker than expected U.S. economic news and persistent international concerns weighed on yields, as a flight to safety, attractive U.S. Treasury yields versus other sovereign debt, and sentiment changes regarding Fed timing pulled in the opposite direction and created pronounced rate movements in both directions.

What is our outlook for the remainder of 2015?   Click here for the full report.

Posted on Tuesday, May 12, 2015 @ 10:06 AM • Post Link Share: 
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  Inside First Trust ETFs: A Snapshot of Q1 Flows and Trends
Posted Under: ETFs
US-listed exchange-traded fund (ETF) net inflows totaled $59.1 billion during the first quarter of 2015, according to Morningstar.1 International Equity ETFs and Taxable Bond ETFs received the strongest net inflows, totaling $37.7 billion and $20.2 billion, respectively, while US Equity ETFs had the largest net outflows, totaling $12.6 billion. (See Table 1 below) Within the International Equity category, currency hedged ETFs received $26.5 billion in net inflows, as US investors sought to avoid foreign currency risk. Within the Taxable Bond ETFs category, net inflows were strongest among High Yield Bond ETFs (+$4.8 billion), Corporate Bond ETFs (+$4.8 billion), Intermediate-Term Bond ETFs (+$3.5 billion), and Preferred Stock ETFs (+$1.9 billion). Interestingly, net outflows for the US Equity category may not be as bad as they seem, as outflows from a single ETF totaled nearly $31.3 billion. Apart from this ETF, the US Equity ETFs category received $18.8 billion in net inflows.

Click Here to continue reading.

1Morningstar Direct. Includes all US-listed
exchange-traded funds, exchange-traded
notes and other exchange-traded products.
Posted on Tuesday, May 05, 2015 @ 1:03 PM • Post Link Share: 
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  Senior Loan & High Yield Quarterly Review
Posted Under: Senior Loan
Senior loans and high-yield bonds, after a volatile second half in 2014, posted healthy returns in the first quarter of 2015. In fact, first quarter 2015 returns outpaced the full-year 2014 returns for both senior loans and highyield bonds. In contrast to last year, the start of this year has been driven by oil showing signs of stability (at least for now) after a nearly 50% decline in the second half of 2014, a market much more willing to tolerate the current geopolitical climate, and strength in returns across both the high-yield bond and leveraged loan markets. Moreover, an incredibly strong undercurrent created by some form of quantitative easing by central banks around the world is driving a global search for yield. With low and negative yields becoming commonplace in many countries and central banks furiously weakening currencies to stimulate demand for their countries goods and services, the U.S. finds itself standing alone, with interest rate increases, not decreases, on the horizon and a strong currency. The net result is that investors around the world are buying U.S. fixed-income instruments at an extraordinary pace. We believe the combination of this powerful technical demand for U.S. fixed-income securities, a healthy, albeit slow growing U.S. economy, and sound fundamentals (modest corporate defaults) within corporate America should continue to support the performance of fixed-income markets, including senior loans and highyield bonds.

For a discussion of notable events in the senior loan and high-yield market as well as an outlook for the future, click here to read the whole report.

Posted on Thursday, April 30, 2015 @ 2:43 PM • Post Link Share: 
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  First Quarter 2015 CEF Review
Posted Under: CEFs
The first quarter of 2015 was a decent one for diversified closed-end fund (CEF) investors with the average fund up 2.03%. The continued decline in global interest rates was particularly beneficial to fixed-income CEFs which were up 3.04% for the quarter. While it was a volatile quarter for equities (particularly U.S. equities), the average equity CEF still managed to achieve a gain of 0.44% for the first three months of the year, although domestic equity CEFs were lower by 0.43%.
Leveraged municipal CEFs had a strong quarter (up 3.08%). As I wrote on 1/26/20151, given our Economic Team's forecast that both short- and long-term interest rates could begin to slowly rise this year, I prefer investors focus more on non-levered municipal CEFs (which tend to have less duration risk than leveraged municipal CEFs), while still providing attractive tax-free income as well as important balance in a portfolio. Non-leveraged municipal CEFs also had a strong first quarter of 2015, up 2.87%.

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Posted on Tuesday, April 21, 2015 @ 12:51 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.
Search Posts

Senior Loan Closed-End Funds off to a Strong Start in 2015
Two Trillion Dollars and Counting…
Technology Dividends — A Missing Ingredient in Your Equity Income ETF
Fourth Quarter 2014 CEF Review
Senior Loan & High Yield Review – 4th Quarter 2014
Senior Loan & High Yield Quarterly Review
Early Thoughts on Tax-Loss Selling Season
Seeking Alpha with Biotechnology ETFs
Municipal Market Update - 2nd Quarter 2014
Senior Loan & High Yield Review - 2nd Quarter 2014
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