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Jeff Margolin
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  Two Paths for ETF Growth
Posted Under: ETFs
Summary of Q2 2018 ETF Flows and Trends¹

  • Total US-listed ETF Assets reached $3.54 trillion at the end of Q2 2018, a 18.7% year-over-year increase. Estimated net asset flows in Q2 2018 totaled $57 billion, down slightly from Q1 2018.
  • US Equity ETFs received the strongest estimated net inflows in Q2 2018, totaling $38 billion, rebounding from a lackluster Q1, in which estimated net inflows totaled just $1.3 billion. Sector Equity ETFs received an estimated $2.3 billion in net inflows for Q2 2018, down from $10.2 billion in Q1.
  • Taxable Bond ETFs received the second highest estimated net inflows in Q2 2018 with $29 billion, nearly doubling the total from Q1. Municipal Bond ETFs received nearly $2 billion in estimated net inflows during Q2 2018, setting a new high-water mark for net inflows in a calendar quarter for the category.
  • International Equity ETFs had the largest estimated net outflows during Q2 2018, totaling $12 billion, following a strong Q1, in which the category added $33 billion in estimated net inflows.
  • Commodities ETFs and Alternatives ETFs both had estimated net outflows in Q2 2018, totaling $0.9 billion and $0.8 billion, respectively.

¹ Source: Morningstar, as of 6/30/18. Includes all US-listed exchange-traded funds, exchange-traded notes and other exchange-traded products. All net inflow and outflow numbers are estimates based on information provided by Morningstar.

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Posted on Thursday, August 23, 2018 @ 9:13 AM • Post Link Share: 
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  Emerging Market Local Currency Review - 2nd Quarter 2018
Posted Under: Emerging Markets
The JP Morgan GBI-EM Global Diversified Index (the "Index") returned -10.40% for the 2nd quarter of 2018 as emerging market ("EM") assets came under increasing pressure. The yield on the Index rose 59 basis points (bps) over the quarter to 6.59% while similar duration 5-yr maturity U.S. Treasury bond yields rose 18bps to 2.74%.

A significant contributor to the weaker quarterly returns came from weaker emerging market currencies versus the U.S. dollar. These weaker currencies on average contributed -8.34% to the Index return. Higher emerging market bond yields contributed to the remaining negative returns.

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Posted on Monday, August 13, 2018 @ 12:02 PM • Post Link Share: 
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  Municipal Update 2nd Quarter 2018
Posted Under: Municipal
First Half of 2018: Municipal Market Performance and Highlights
  • Municipals outperform Treasuries in first half of 2018: Municipal market returns were relatively flat in first half of 2018. The Barclays Municipal Bond Index (BMBI) returned -0.25% during first half of 2018 and outperformed the Barclays Treasury Bond Index by 83 basis points (bps). For the trailing twelve months ended June 30, 2018, the BMBI had a total return of 1.56%, compared to the Barclay's U.S. Treasury Index return of -0.65%.
  • Rates and Fed Activity: Healthy U.S. economic statistics including payroll and wage growth, increasing inflation statistics, and U.S. Federal Reserve activity, including two FOMC rate hikes and the beginning of balance sheet downsizing, weighed on treasury prices in the first half of 2018. At June 29, 2018, the 10-year U.S. Treasury yield stood at approximately 2.86%, a 45 basis point increase from the start of the year. 
  • Overall Municipal Issuance Declines: In the first half of 2018, total municipal issuance declined by 21.8% led by a decline in advance refunding activity. The ability for municipal borrowers to pursue advance refunding of municipal bonds on a tax-exempt basis was a casualty of the Tax Cuts & Jobs Act. YoY, refunding issuance has declined 53%.
  • Despite Higher Rates, Retail Demand Remains Positive: Retail demand for the first half of 2018 totaled $13.6 billion of inflows, nearly identical to the $13.8 billion for the six months prior. Since the beginning of 2017, the municipal market has only seen three months of net outflows.
  • Credit Trends Positive: Municipal credit quality trends remained favorable in the first half of 2018. Through June 30, 2018, using MMA data, first-time municipal defaulters totaled just 12 borrowers compared to 22 and 29 in 2017 and 2016, respectively. Moody's credit rating upgrade vs. downgrade ratios also suggest favorable credit trends, with the number of credit rating upgrades exceeding downgrades in each of the last three quarters and six of the prior seven (for the quarter ended March 31, 2018).
  • Tighter Credit Spreads: During the first half of 2018, credit spreads compressed significantly for high yield municipals. Regarding investment grade rated municipals, A and BBB rated bond spreads declined modestly. See figures 1 and 3 below.
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Posted on Tuesday, August 7, 2018 @ 2:31 PM • Post Link Share: 
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  Alternatives Update 2nd Quarter 2018
Posted Under: Alternatives
There was a whole lot less sound and fury from the capital markets in the 2nd quarter of 2018 as compared to the 1st quarter of 2018. Volatility, as measured by the CBOE VIX Index (VIX), averaged 2 points less (15.33 vs 17.35) and had a significantly narrower range (11.98 points vs 28.17 points). However, that is not to say that the 2nd quarter was uneventful or without drama. There was a distinct escalation in trade war jargon, rocky Brexit negotiations, Elon Musk taunting short sellers, the vilification of Harley Davidson by the President, NATO bashing, immigration controversy in the U.S. and Europe, oil rallying on continued OPEC cooperation and emerging markets and Chinese equities showing decided weakness. 

The wild ride in cryptocurrencies seemed to moderate, if one could call it a moderation. Bitcoin fell -13.91% in the quarter and experienced an annualized standard deviation of returns of 62% as compared to an annualized standard deviation of 103% in the 1st quarter of 2018 (see Figure 1). The cryptocurrency market continues to be hampered by high profile hacks at various cryptocurrency exchanges. The latest, Coinrail of South Korea, had 30% of its virtual currencies stolen in June amounting to nearly $40 million. This was not exactly what the sector needed following the largest virtual theft of $530 million from Japan's Coincheck in January 2018. If this market is to move forward and grow, the lack of security will have to be addressed for both investor confidence and regulatory approval.

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Posted on Wednesday, July 25, 2018 @ 3:45 PM • Post Link Share: 
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  Second Quarter 2018 CEF Review
Posted Under: CEFs
Second Quarter 2018 Overview
Following a quarter in which the average closed-end fund (CEF) was lower by 3.80%, many categories posted slight gains during the second quarter of 2018. Indeed, the average CEF was up 0.98% for the second quarter but is lower by 2.91% year-to-date (YTD) as of the end of the second quarter. Equity CEFs were positive on average by 1.14% for the quarter but are still lower 3.87% YTD. Fixed-income CEFs were up on average 0.82%, but are still down 2.40% YTD. Within fixed-income CEFs, taxable fixed-income funds gained an average of 0.55% for the second quarter but remain lower by 0.98% YTD. Municipal CEFs were positive by 1.35% during the second quarter and are down 3.59% YTD. (Source: Morningstar. All data is share price total return.)

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Posted on Wednesday, July 18, 2018 @ 3:20 PM • Post Link Share: 
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  Senior Loan & High Yield Review - 2nd Quarter 2018
Posted Under: Senior Loan
Macro Overview

Interest rates remained in an upward trajectory as the 10-year U.S. Treasury bond yield climbed from 2.74% at the end of the first quarter to 2.86% at the end of the second quarter. The yield touched 3.11% in May but retreated shortly thereafter. The interest rate volatility led to further total return declines in rate sensitive fixed income assets, with the Bloomberg Barclays US Aggregate Bond Index, a good proxy for the overall bond market, down 0.16% in the quarter and down 1.62% year-to-date. Investment grade corporate bonds fared even worse, down 0.94% in the quarter and down 3.12% year-to-date. Equity market volatility also increased in the quarter but despite this and the higher interest rates, high-yield bonds and senior loans fared well on a relative basis during the quarter. The high-yield bond index was up 1.00% in the quarter while the senior loan index was up 0.71%. Senior loans are now up 2.17% on the year, better than all other major fixed income markets, while high-yield bonds are up 0.07% (Exhibits 1 and 2).

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Posted on Friday, July 13, 2018 @ 1:14 PM • Post Link Share: 
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  What’s Driving the Recovery In Biotechnology ETFs?
Posted Under: ETFs
Summary of Q1 2018 ETF Flows and Trends¹

  • Total US-listed ETF Assets reached $3.45 trillion at the end of Q1 2018, a 22.9% year-over-year increase.  Total estimated net asset flows in Q1 2018 totaled $66 billion, a 50% drop from the prior quarter, marking the slowest quarter for total estimated net inflows since Q2 of 2016.
  • International Equity ETFs received the strongest estimated net inflows in Q1 2018, totaling $33 billion, only slightly less than the prior quarter.  Year-over-year, International Equity ETF assets increased by over 43%.
  • Taxable Bond ETFs received the second highest estimated net inflows with $15 billion, bringing the category's year-over-year increase in total assets to 20%.
  • Sector Equity ETFs received $10 billion in estimated net inflows, increasing year-over-year assets by 14%, while the broader US Equity ETFs category received $1.3 billion in estimated net inflows, increasing year-over-year assets by 19%.
  • Commodities ETFs and Alternatives ETFs, which received $2.5 billion and $3.1 billion in estimated net inflows, respectively, were the only two categories that had greater estimated net inflows in Q1 2018 than the prior quarter.

¹ Source: Morningstar, as of 3/31/18. Includes all US-listed exchange-traded funds, exchange-traded notes and other exchange-traded products. All net inflow and outflow numbers are estimates based on information provided by Morningstar.

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Posted on Thursday, May 24, 2018 @ 2:43 PM • Post Link Share: 
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  Emerging Market Local Currency Review - 1st Quarter 2018
The widely followed emerging market ("EM") local currency benchmark, the JP Morgan GBI-EM Global Diversified Index (the "Index") returned 4.42% for the 1st quarter of 2018. The yield on the Index fell 13 basis points (bps) over the quarter to 6.01% while 5-year U.S. Treasury bond yields rose 35 bps. 

Stronger emerging market currencies resulted in a gain of 2.08% for the Index over the quarter as these currencies strengthened versus the U.S. dollar on average. The remaining return for the Index came from the return of the emerging market domestic treasury bonds.

Through the first quarter we continued to see economic fundamentals improve across many emerging market countries. The uptrend in economic growth can be seen by the steady improvement in manufacturing surveys across regions.

The chart below shows the Markit manufacturing purchasing indices of some of the major emerging market countries, China, India, Brazil, Russia and South Africa as well as the combined Markit Emerging Markets Manufacturing PMI Index. Numbers over 50 indicate periods of improving economic conditions while under 50 indicates periods of falling economic conditions. There has been a steady improvement in these surveys since the end of the first quarter of 2015 for most emerging market countries with a slightly more protracted period of weakness seen in Brazil. 

Part of the reason sentiment continues to improve is the dramatic easing we have seen in many emerging market countries in response to lower inflation and their stronger currencies. The average monetary policy rate of the 20 emerging market countries we follow most closely has declined from 4.83% at the beginning of 2015 to 3.86% as of the end of the 1st quarter of 2018. We believe the lower interest rates are a strong impulse to help stimulate domestic demand and broader economic growth going forward.

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Posted on Monday, May 7, 2018 @ 2:43 PM • Post Link Share: 
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  Alternatives Update 1st Quarter 2018
The 1st quarter of 2018 came in like a lion with the S&P 500 Index (SPX) up 5.73% in January and the MSCI Emerging Markets Index up 8.33%. It however, did not go out like a lamb. The SPX fell 6.13% and MSCI Emerging Markets Index fell 6.39% over the subsequent two months. There was a distinct reversal in themes from 4th quarter of 2017, namely cryptoasset mania and the absence of volatility. Bitcoin lost over 52% of its value during the quarter (see Figure 1). Equity volatility, as measured by the closing value of the CBOE VIX Index (VIX), spiked to a high of 37.32 during the quarter. This level was over 4 times the record low reading in November 2017 (9.14) and almost 4 times the average of the first week of the first quarter. Lost in the closing values was that the VIX went on to hit 50.30 in overnight trading after the equity markets had closed on February 5th. The portmanteau "Volmagedon" is being used by some to describe the breathtaking movement of the VIX from February 2 to February 6 and its impact on various corners of the capital markets.

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Posted on Thursday, April 26, 2018 @ 3:52 PM • Post Link Share: 
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  Senior Loan & High Yield Review – 1st Quarter 2018
Posted Under: Senior Loan
Macro Overview

As we entered 2018, we believed that inflation expectations were too low given the relative health of the U.S. economy and the tightening labor market. This proved to be accurate as inflation data, specifically wage data, began to show modest signs of improvement in the first quarter. This wage improvement was the primary catalyst for one of the largest upward moves in interest rates since the Taper Tantrum, in May 2013. Interest rates, as measured by the 10-year U.S. Treasury, increased 33 basis points (bps) in the quarter to 2.74% from 2.41% and were up 70 bps from the September low of 2.04%. Notably, the yield touched 2.95% during the quarter but later declined. The bonds most susceptible to changes in interest rates moved lower as rates climbed. These include investment grade corporate bonds, which were down 2.20% over the quarter, and a broader measure of the overall bond market, the Bloomberg Barclays U.S. Aggregate Index which was down 1.46%. Despite equity market volatility and higher interest rates, high-yield bonds and senior loans fared well on a relative basis. High-yield bonds were down 0.92% while senior loans were up 1.45%.

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Posted on Thursday, April 19, 2018 @ 2:12 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
Alpha, Expenses, and the Shift from Active to Passive
Municipal Update 4th Quarter 2017
Emerging Market Local Currency Review - 4th Quarter 2017
Alternatives Update 4th Quarter 2017
Fourth Quarter 2017 CEF Review
Senior Loan & High Yield Review
Actively Managed Fixed Income ETFs Gain Marketshare
Credit Check – October 2017
Emerging Market Local Currency Review - 3rd Quarter 2017
High-Yield Spreads and Time Walk Hand in Hand
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