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  This Covered Call Index Tends To Beat The Broader Market In Low And Negative Return Climates
Posted Under: Broader Stock Market

View from the Observation Deck  
  1. From 2002-2017, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in five of the 16 calendar years. It has lagged year-to-date thru 3/9/18 (see table).
  2. While covered call options can generate an attractive level of current income, they also can cap the potential for capital appreciation.
  3. The use of a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (2002 & 2008) and when returns range from 0% to 10% (2007, 2011 and 2015), though the BuyWrite Index did not outperform the S&P 500 Index in 2005.
  4. Covered call writing tends to be less beneficial when stock market returns are well above 10%, such as in 2012, 2013, 2014, and 2017 (see table). 
  5. As of 3/9/18, the S&P 500 Index stood 3.00% below its all-time high of 2,872.87, set on 1/26/18, according to Bloomberg. 
  6. We believe that corporate earnings growth determines the direction of stock prices over time. 
  7. Bloomberg's 2018 and 2019 consensus earnings growth rate estimates for the S&P 500 Index were 16.59% and 10.30% as of 2/28/18. That 2018 target is well above the 0% to 10% range.
  8. From 1926-2017 (92 years), the S&P 500 posted an average annual total return of 10.16%, according to Ibbotson & Associates/Morningstar.
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option.

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Posted on Tuesday, March 13, 2018 @ 1:59 PM • Post Link Share: 
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  US Stocks Ended March 9, 2018
Posted Under: Weekly Market Commentary

Following an excellent January (+5.73%) and a dismal February (-3.69%), last week the S&P 500 Index returned 3.59% recording its second best week of trading in 2018. Equities have pushed back into positive territory (+4.63% YTD) after taking investors on a seesaw ride for 2018. Trade war fears, sparked the previous week by President Trump's proposed import tariffs on steel and aluminum, softened last week after some exemptions were revealed. Positive US economic news showed February nonfarm payroll increases of 313K, much higher than the expected 205K and January was revised up to 239K from the previously reported 200K. US initial jobless claims of 231K were higher than the consensus estimate of 220K and the previous week's 210K. Crude oil prices increased 1.29% and closed the week at $62.04 per barrel. All sectors posted gains last week with the S&P 500 Industrials, Financials, and Information Technology Indexes leading the way with returns of 4.45%, 4.42%, and 4.30% respectively. The best performing stock for the week in the S&P 500 Index was XL Group Ltd., a global insurer and reinsurer for industrial and commercial companies. The stock returned 28.57% last week due to the announcement that AXA SA had entered an agreement to acquire the company for $57.60 per share, a 33% premium over the previous week's closing price. Autodesk Inc., a producer of architectural design, mechanical design, and geographical PC software, jumped 14.87% on Wednesday after reporting a loss smaller than originally anticipated and many analysts increased their price targets. The company has transitioned to a subscription-based model helping increase their recurring revenue growth forecast. Lam Research Corp., a manufacturer of semiconductor processing equipment used in making integrated circuits, posted a15.92% return last week. On Tuesday, the information technology company announced a plan to return a minimum of 50% of free cash flow to shareholders over the next five years, increase their quarterly dividend by 120%, and repurchase an additional $2 billion in shares. Next week will bring earnings news from Adobe Systems Inc., Broadcom Limited, Dollar General Corp., and Ulta Beauty Inc.
Posted on Monday, March 12, 2018 @ 8:55 AM • Post Link Share: 
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  US Economy and Credit Markets Ended March 9, 2018
Posted Under: Weekly Market Commentary

Investors were uneasy after a multitude of geopolitical events grabbed headlines last week. Treasury yields dropped Monday in the wake of the Italian election and continued uncertainty surrounding trade rhetoric out of Washington. The unrest following the resignation of economic advisor Gary Cohn along with European Central Bank President Mario Draghi's dovish statements drove Treasury yields even lower as investors fled equities. After much anticipation, President Donald Trump signed off on tariffs for steel and aluminum late Thursday with the terms softening the impact for U.S. neighbors Canada and Mexico. Treasury yields bounced back Friday after better than expected February nonfarm payrolls data. The U.S. economy added 313,000 jobs in February, well above the consensus of 205,000 and the largest increase in 19 months. This comes after the February ADP employment change beat consensus estimates by 35,000 jobs on Wednesday. The U.S. economy reported strong job growth despite average hourly earnings growth. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Tuesday: February CPI MoM (0.2%, 0.5%); Wednesday: March 9 MBA Mortgage Applications (N/A, 0.3%), February Retail Sales Advance MoM (0.3%, -0.3%), February PPI Final Demand MoM (0.1%, 0.4%); Thursday: March Empire Manufacturing (15.0, 13.1), March 10 Initial Jobless Claims (225k, 231k); Friday: February Housing Starts (1288k, 1326k), February Industrial Production MoM (0.3%, -0.1%), March Preliminary University of Michigan Sentiment (99.0, 99.7).
Posted on Monday, March 12, 2018 @ 8:52 AM • Post Link Share: 
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  Passive Investment Vehicles Have Posted The Strongest Asset Growth Since The End Of 2007
Posted Under: Conceptual Investing

View from the Observation Deck  

  1. This marks the seventh calendar year in which we have tracked the asset growth of the four major types of packaged products since the close of 2007 (prior to financial crisis in 2008-2009).
  2. The percentage change in the total assets invested in packaged products from 12/31/07 to 12/31/17 were as follows (chart): Exchange-Traded Funds (ETFs) (+459%); UITs (+60%); Mutual Funds (+56%); and Closed-End Funds (-12%).
  3. From 2016 to 2017, total assets in each of the four major types featured in the chart fluctuated as follows: ETFs ($2.5 trillion vs. $3.4 trillion); UITs ($85 billion vs. $85 billion); Mutual Funds ($16.3 trillion vs. $18.7 trillion); and Closed-End Funds ($262 billion vs. $275 billion).
  4. Last year, investors favored passive investing over active management. Data from Morningstar shows that estimated net flows to all "Active" long term mutual funds and ETFs totaled -$7 billion in 2017, while estimated net flows to all "Passive" funds and ETFs totaled $691.6 billion.
  5. We have noted in previous blog posts that some industry pundits have predicted that ETFs, in time, will supplant mutual funds as the most popular packaged product. We intend to continue monitoring. 

This chart is for illustrative purposes only and not indicative of any actual investment. 

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Posted on Thursday, March 8, 2018 @ 2:20 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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