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Jeff Margolin
Closed-End Fund Analyst
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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.

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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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  Fourth 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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  Senior Loan Closed-End Funds off to a Strong Start in 2015
Posted Under: CEFs
After a challenging 2014 when the average senior loan closed-end fund (CEF) was lower by 1.93%, senior loan CEFs are off to a strong start in 2015. Indeed, the average senior loan CEF is up 5.53% year-to-date (YTD), which makes the senior loan CEF category one of the best-performing taxable fixed-income categories within the Morningstar universe so far this year. By comparison, the average taxable fixed-income CEF is up 2.91% YTD. (All data is from Morningstar on a share price total return basis through 3/25/15.)

I believe there are a few key reasons for the strong start to the year for senior loan CEFs including:

1. Investors are starting to recognize and take advantage of the compelling valuations as well as compelling fundamentals that exist in the senior loan asset class and senior loan CEFs. While many fixed-income asset classes trade on average above par, the average senior loan as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index is trading at a slight discount to par. According to Bloomberg, the average senior loan price was 96.16 as of 3/25/15. Moreover, while average discounts to net asset value (NAV) have narrowed to 6.32% as of 3/25/15 from the 9.09% they ended 2014, according to Morningstar, they are still wider than historical averages. One year ago the average discount to NAV was 5.22%, three years ago the average discount to NAV was 0.66%, five years ago the average premium to NAV was 3.27%, and 10 years ago the average discount to NAV was 0.79% (Morningstar as of 3/25/15). Lastly, fundamentals continue to be sound with the default rate by number of loans falling to 0.73% in February from 0.75% in January, according to Standard & Poor’s.

2. Investors are in the very early stages of repositioning their fixed-income portfolios to shorten durations ahead of a potential increase in the federal funds rate later this year.

While just under three months does not make a long-term trend, it has been encouraging to see share price momentum build in senior loan CEFs in 2015, particularly after a difficult 2014. Based on the continued strong fundamentals in the senior loan asset class, compelling valuations among senior loan CEFs and the senior loan asset class, I continue to believe senior loan CEFs should be part of a diversified CEF portfolio. Please see my CEF Quarterly Commentary from January for further comments on senior loan CEFs as well as other categories I currently favor. Click here to view.
Posted on Monday, March 30, 2015 @ 10:29 AM • Post Link Share: 
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  Two Trillion Dollars and Counting…
Posted Under: ETFs

2014 was a record-setting year for US-listed ETFs, with assets exceeding $2 trillion by year end, according to Morningstar.  This increase of approximately 18% versus the end of 2013 was fueled by record net inflows, which totaled an estimated $241.9 billion.¹ As usual, ETF net flows were not equally distributed among major asset categories.  Results for the fourth quarter were generally in line with the full year, as 3 of the top 4 categories for inflows were equity-related (US Equity, Sector Equity, International Equity), while the Taxable Bond category received the second most inflows during the fourth quarter and the full year.  Also following the trend established during most of 2014, the Commodities ETF category had the largest net outflows.

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¹Morningstar Direct. Includes all US-listed exchange-traded funds, exchange-traded notes and other exchange-traded products.

Posted on Tuesday, February 17, 2015 @ 1:48 PM • Post Link Share: 
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  Technology Dividends — A Missing Ingredient in Your Equity Income ETF
Posted Under: ETFs

Over the past 5 years, few themes have more consistently resonated with ETF investors than equity income.1 Since 9/30/2009, equity income ETFs have collectively gathered over $50 billion in net inflows, with positive net inflows in 19 out of the last 20 quarters.2 This recent popularity can largely be attributed to investors’ growing appetite for income in a yield-starved interest rate environment, combined with the perception that dividend-paying stocks may be less risky than non-dividend payers.

As we’ve discussed in previous newsletters, however, one of the risks that investors face with equity income ETFs is sector concentration.  While there is nothing inherently wrong with overweighting certain sectors while underweighting others, large sector bets may produce unexpected or undesirable results.  For example, on 9/30/08, just before the collapse of the financial services sector, equity income ETFs allocated an asset-weighted average of 42.6% to financial stocks, representing a 26.6 percentage point overweight relative to the S&P 500 Index.3 Unfortunately for investors, financial stocks suffered extreme negative returns over the next 6 months.  Interestingly, the financial sector is currently the second most underweight sector within equity income ETFs, relative to the S&P 500 Index.4 Conversely, utilities and consumer staples are the two most overweight sectors within equity income ETFs, with average allocations 8.1 and 7.0 percentage points higher than the S&P 500 Index, respectively.5

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¹Included in this group are non-sector US equity ETFs whose names suggest a “dividend” or “income” strategy.
²Morningstar Direct, as of 9/30/14.
³Morningstar Direct.  As of 9/30/14, there were 17 US listed equity income ETFs.  ETF AUM-weighted average sector allocation is used in this comparison to best represent the sector allocation of most investor dollars.
4Morningstar Direct, as of 9/30/14.
5Morningstar Direct, as of 9/30/14.

Posted on Tuesday, February 17, 2015 @ 1:46 PM • Post Link Share: 
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  Fourth Quarter 2014 CEF Review
Posted Under: CEFs

2014 was a solid year for diversified closed-end fund (CEF) investors. I specifically use the term “diversified” because whether I am writing about CEFs or giving a presentation about the CEF structure, I always encourage investors to diversify across several different categories of the CEF structure in order to attain proper diversification and exposure to many different asset classes. According to Morningstar, the average CEF was up 7.88% last year on a share price total return basis. As always, performance varied significantly depending on the category.

For example, two of the categories I advocated investors have exposure to in my commentary a year ago posted solid total returns. The decline in long-term interest rates, coupled with continued very low leverage cost, was particularly beneficial to long-duration municipal CEFs. Municipal CEFs were up on average 17.80% on a share price total return basis in 2014. Many equity-oriented CEF categories also performed well in 2014, particularly equity funds with an emphasis on U.S. equities. Indeed, according to Morningstar, the average domestic equity CEF was positive by 6.10% on a share price total return basis.

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Posted on Monday, January 26, 2015 @ 10:36 AM • Post Link Share: 
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  Senior Loan & High Yield Review – 4th Quarter 2014
Posted Under: Senior Loan

2014 proved to be far more eventful than most predicted. Consider the nearly certain prognostication that rates would increase in 2014, the surprising impact the polar vortex had on economic activity early in the year, geopolitical headlines Russia/Ukraine, Middle East [Gaza, ISIS], Europe [Greece], etc.), Ebola fears, and last, but most certainly not least, the nearly 50% drop in the price of oil (more on this in a moment). As a result, while sentiment was relatively positive in the early part of the year, investor sentiment for credit risk reversed course and was relatively weak throughout the second half of the year.

In the third quarter, we wrote about how we believed the “risk sentiment” shift was driven by technical factors (more sellers than buyers) rather than fundamentals. Our view has simply been that the U.S. economy continues its slow, yet relatively steady march higher (with improvements in GDP and unemployment) and corporate credit fundamentals remains healthy (with modest corporate defaults and healthy profits). Indeed, the U.S. economy has proven resilient, and even surprising to many with better growth in the latter part of the year. However, despite what’s occurring in the U.S., macro uncertainty continues to incite volatility in U.S. financial markets. As we enter 2015, oil will remain in the headlines given that its collapse will pressure economies that are heavily dependent on crude oil exports. The concern centers on whether we’ll have an emerging market debt and currency crisis similar to that which we experienced in 1998 (when Russia defaulted on its debt). In addition, all eyes are going to be directed at whether the European Central Bank’s (ECB) stimulus program (its own version of QuantitativeEasing) is enough to improve the Eurozone economy. Speculation is already mounting regarding the potential size and scale of such stimulus.

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 Wednesday, January 21, 2015 @ 3:50 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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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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Commodity ETFs and the Business Cycle
Year-To-Date Performance of Municipal Closed-End Funds Shows the Importance of Balance
Mid-Quarter Update: Good Start to 2014 for Many Categories of CEF Marketplace; Still Compelling Values Available
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