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  Broad Commodity ETFs Gain Traction in Q2: Will the Trend Continue?
Posted Under: ETFs

Summary of Q2 2016 Estimated ETF Flows and Trends

  • Overall US listed ETF net inflows totaled $34.2 billion in Q2, slightly accelerating from $32.8 billion in net inflows in the previous quarter.
  • For the second quarter in a row, the strongest category for net asset flows was Taxable Bond ETFs, with $13.1 billion in net inflows in Q2.
  • Flows into US Equity ETFs rebounded in Q2 with $12 billion in net inflows, reversing the $2.1 billion in net outflows from Q1. Flows into Sector
  • Equity ETFs also rebounded in Q2 with $3.3 billion in net inflows, compared to $5.5 billion in net outflows in Q1.
  • For the second straight quarter, Commodity ETFs had relatively strong net asset flows with $6.9 billion in net inflows, a large percentage of which came from precious metals ETFs. However, unlike Q1, the "broad commodity ETFs" subcategory also had a significant increase in net inflows, totaling $770 million. This represents the strongest level of net inflows for broad commodity ETFs since Q1 of 2011.
  • International Equity ETFs reported net outflows totaling $3.8 billion in Q2, marking the second consecutive quarter for net outflows.

All net inflow and outflow numbers are estimates based on information provided by Morningstar.

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Posted on Tuesday, August 16, 2016 @ 12:09 PM • Post Link Share: 
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  Alternatives Update 2nd Quarter 2016
Posted Under: Alternatives

In the second quarter, Alternative Investments ("Alternatives") generally had positive performance with tangible assets (commodities and real estate) posting strong returns. Managed futures was a notable outlier with a negative 2nd quarter, lagging not only other Alternative categories but traditional asset classes as well. Year-to-date, most Alternative categories are keeping pace or outperforming traditional asset classes, with once again tangible assets leading the way. Short bias strategies have had considerable success most likely due to a combination of periodic freefalls in the broader equity markets, increased volatility, and wider dispersion in both sector and single name returns. Lagging categories were primarily focused in the equity markets (hedged equity and equity market neutral). Managed futures, commodities, and global macro historically have shown low correlations to stocks and bonds and based upon monthly correlations over the past two years, this continues to be the case. Other Alternative categories, while having higher correlations with equities, generally do so with considerably less volatility.

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Posted on Tuesday, August 16, 2016 @ 8:27 AM • Post Link Share: 
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  Municipal Update 2nd Quarter 2016
2nd Quarter 2016 Municipal Market Performance and Highlights
  • Positive Performance Continues: For the three months ended June 30, 2016, the Barclays Municipal Bond Index returned 2.62% while the non-investment grade index posted a total return of 5.10%. In comparison, the Barclays U.S. Treasury Index returned 2.10% for the same period. (Source: Barclays)

  • Exceptional Risk-Adjusted Performance: Risk adjusted returns for municipal bonds relative to other asset classes remained attractive during the first half of the year. The Barclays Municipal Bond Index and High Yield Municipal Bond Index returned, on a tax and risk adjusted basis, 8.61% and 4.89%, significantly ahead of other major asset classes. The nearest competitor was high yield corporate debt which returned 1.94% (see Figure 2). (Source: Barclays, Bloomberg)

  • Considerable Demand for Municipal Debt: Retail demand for municipal bonds remained exceptionally robust during the second quarter of 2016.  Municipal fund flows were $18.6 billion in the second quarter of 2016 compared to $2 billion of outflows in the second quarter of 2015. Total inflows year-to-date stand at $33 billion. (Source: Barclays, Investment Company Institute)

  • Supply Grew During the Second Quarter: The pace of new issue supply grew in the 2nd quarter of 2016 by 3% to a total of $122 billion. Supply for the year is now just 2% below last year's and shows clear signs of accelerating, in our opinion. (Source: Barclays, SIFMA)

  • Stable Credit Quality: Just 11 borrowers defaulted for the first time in the second quarter of 2016 compared to 16 during 2015 and 21 in 2014. However, the par value of defaults increased to $3.96 billion from $620 million – nearly entirely because of Puerto Rico. The market has, in our view, appropriately treated Puerto Rico as an outlier and signs of contagion are minimal. (Source: MMA)

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Posted on Friday, July 29, 2016 @ 11:50 AM • Post Link Share: 
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  U.S. Investment Grade Credit Investor Update - 2nd Quarter 2016
Posted Under: Investment Grade Credit

Following the dramatic spread-widening and subsequent sharp reversal during the first quarter, the Barclays Corporate Index option-adjusted spread (OAS)1 rallied back to roughly unchanged for the year by the beginning of the second quarter. The spread rally continued into the second quarter, as fears about growth in China subsided and sentiment in the oil and basic materials markets steadily improved. However, as the May new issue calendar reached the highest monthly level on record, and as the Federal Reserve (Fed) stepped up its hawkish rhetoric, the rally stalled and spreads widened modestly into June. And then things got interesting.

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1Option-adjusted spread is the spread relative to a risk-free interest rate, usually measured in basis points (bp), that equates the theoretical present value of a series of uncertain cash flows of an instrument to its current market price. OAS can be viewed as the compensation an investor receives for assuming a variety of risks (e.g. liquidity premium, default risk, model risk), net of the cost of any embedded options. A larger OAS implies a greater return for greater risks.

Posted on Thursday, July 28, 2016 @ 8:41 AM • Post Link Share: 
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  Emerging Market Local Currency Review - 2nd Quarter 2016
Posted Under: Emerging Markets

Emerging markets enjoyed a positive second quarter to end the first half of 2016, despite the ongoing uncertainty plaguing developed market economies. For developed markets, negative interest rates, lethargic economic growth and geo-political concerns like "Brexit" dominated the agenda.

By contrast, emerging markets have rebounded strongly from the volatility we saw in the first quarter of 2016. As an indication, the most widely followed benchmark, the JP Morgan GBI-EM Global Diversified Index returned 2.71% for the second quarter and 14.02% year-to-date. The yield on the benchmark index declined 19 basis points (bps) to 6.33% at the end of the quarter. Over the same period, the yield on 5-yr maturity U.S. Treasury bonds declined 21 basis points to 1.0%.

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Posted on Thursday, July 28, 2016 @ 8:33 AM • Post Link Share: 
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  Second Quarter 2016 CEF Review
Posted Under: CEFs

Following the solid first quarter performance for closed-end funds (CEFs) when the average CEF was positive by 2.73%, the positive momentum continued during the second quarter, with the average CEF up another 6.33%. Indeed, after grinding through a challenging 2015 (particularly the back half of the year), diversified CEF investors have been rewarded with very strong total returns year-to-date with the average CEF now up over 9% through 6/30/2016 (source: Morningstar. All data is share price total return data).

The positive gains were broad based during the quarter with equity CEFs up an average of 7.94%, taxable fixed income CEFs up 6.06% and municipal CEFs up 6.12%. While each category of the CEF marketplace has different factors which impact performance, broadly speaking, some of the factors which continue to benefit many CEFs include: higher equity prices (particularly U.S. equities), declining long-term rates and continued "Plow Horse" (as our Economics team phrases it) economic growth in the U.S. economy which helps to create a positive backdrop for many credit sensitive CEFs. Lastly, high distributions and attractive discounts to net asset values (NAVs), particularly for equity and credit sensitive categories (more on that below,) also helped to attract buyers to the secondary market during the quarter.

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Posted on Wednesday, July 20, 2016 @ 10:36 AM • Post Link Share: 
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  Senior Loan & High Yield Review – 2nd Quarter 2016
Posted Under: Senior Loan
Market Review
In the second quarter of 2016, capital markets experienced a major reversal from the negative trends and high volatility of the first quarter. At the low-point, which was reached on February 11, 2016, the high-yield bond index was off 5.14% and the senior loan index was off 1.36% year-to-date, respectively. However, despite the negative trends and volatility early in the year, the high-yield index has swiftly recovered and is now up 9.32% year–to-date while the senior loan index also reversed course and is up 4.51% over the same time period. These returns compare favorably to the S&P 500 Index which was up 3.84% through the first half of the year.

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Posted on Tuesday, July 12, 2016 @ 4:49 PM • Post Link Share: 
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  1st Quarter 2016 Municipal Market Performance and Highlights
Posted Under: Municipal

1st Quarter 2016 Municipal Market Performance and Highlights

  • While municipal bonds posted positive total returns during the first quarter of 2016, munis lagged other asset classes including U.S. Treasuries. The Barclays Municipal Bond Index returned 1.67% for the three months ended March 31, 2016, while the Barclays Municipal 10 Year Revenue Index had a total return of 1.98%. In comparison, the Barclays U.S. Treasury Index returned 3.20% for the three months ended March 31, 2016. (Source: Barclays, SIFMA.org)

  • Risk adjusted returns for municipal bonds relative to other asset classes remained attractive during the first quarter.

  • Retail demand for municipal bonds remained robust during the first quarter of 2016. Municipal fund flows increased 71.8% to $14.9 billion during the first quarter compared to $8.71 billion for the same time period a year ago. (Source: Barclays, Investment Company Institute)

  • New issue supply has not followed the significant increase in municipal fund flows. Primary market issuance declined just under 9% to $98.8 billion in the first quarter of 2016. During the first three months of 2015, issuance totaled $108.4 billion. (Source: Barclays, SIFMA)

  • Municipal credit quality remains healthy. During the first quarter, Moody's upgraded more municipal credit ratings than downgraded, the third such consecutive quarter. In addition, defaults continued to decline. According to data provided by MMA, the number of defaults totaled just 8 borrowers compared to 18 borrowers a year ago. One caveat to the continuing decline in number of defaulting borrowers, however, is the par value of defaults increased year-to-date due to Puerto Rico related nonpayers.

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Posted on Thursday, June 02, 2016 @ 1:48 PM • Post Link Share: 
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  Three-Year Anniversary for the Largest Actively Managed High Yield ETF
Posted Under: ETFs

Summary of Q1 2016 ETF Flows and Trends¹

  • US listed ETF net inflows totaled an estimated $32.7 billion in Q1, a significant drop from the $95.5 billion in net inflows in the previous quarter.
  • Taxable Bond ETFs had the strongest net inflows, totaling $32.3 billion, more than double the net inflows for the category in the previous quarter.
  • Commodity ETFs—one of two categories with net outflows in Q4 2015—had the second strongest net inflows in Q1 with $9.4 billion, as investors piled into precious metals ETFs.
  • Equity ETF categories had the greatest net outflows in Q1, led by Sector Equity ETFs (-$5.5 billion), International Equity ETFs (-$5.2 billion), and US Equity ETFs (-$2.2 billion).  This was a reversal from Q4 2015, in which all three had relatively strong net inflows.

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¹Based on Morningstar data, as of 3/31/16.

Posted on Monday, May 23, 2016 @ 1:43 PM • Post Link Share: 
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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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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.
 PREVIOUS POSTS
Are Expense Ratios a Dependable Predictor of Returns for Large Cap US Equity ETFs?
Staying the Course with FVD
Robust Growth for Municipal Bond ETFs in 2015
4th Quarter 2015 Municipal Market Performance and Highlights
Senior Loan & High Yield Review – 4th Quarter 2015
The Return of Volatility and the Case for Earnings Quality
Municipal Quarterly Update – 3rd Quarter 2015
Third Quater 2015 CEF Review
Senior Loan & High Yield Review
Diversify Your Short Duration Income Portfolio
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