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 | GICS Sector Reshuffle Exacerbates Top-Heavy Concentration For Certain Sectors |
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| Posted Under: ETFs |
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Summary of Q3 2018 ETF Flows and Trends¹
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Total US-listed ETF Assets reached $3.74 trillion at the end of Q3 2018, an 18.0% year-over-year increase. Estimated net asset flows totaled $90.3 billion in Q3 2018, compared to $57.4 billion Q2 2018.
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US Equity ETFs received the strongest estimated net inflows in Q3 2018, for the second straight quarter, with a total of $50.4 billion, compared to $37.6 billion in Q2 2018. Estimated net inflows for Sector Equity ETFs increased to $15.3 billion in Q3 2018, rebounding from a lackluster Q2 2018.
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Taxable Bond ETFs had the second highest estimated net inflows in Q3 2018 with $23.5 billion. Municipal Bond ETFs received $0.8 billion in estimated net inflows in Q3 2018. Notably, neither fixed income category has had net outflows during a calendar quarter since 2013.
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International Equity ETFs had relatively light estimated net inflows in Q3 2018, totaling $2.0 billion, after shedding $11.6 billion in estimated net outflows in Q2 2018.
- Commodities ETFs faced accelerating estimated net outflows in Q3 2018 totaling $3.1 billion, while Alternatives ETFs had estimated net inflows totaling $1.2 billion.
¹ Source: Morningstar, as of 9/30/18. 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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| | U.S. Investment Grade Credit Investor Update - 3rd Quarter 2018 |
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| Posted Under: Investment Grade Credit |
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Market Review
Given the magnitude of credit spread widening during the 2nd quarter, it should not be too surprising that the investment grade credit market recovered during 3Q 2018. However, given ongoing concerns about rising interest rates, trade tensions, Italian sovereign risk, and the growth of the BBB-rated segment -- the magnitude of the recovery was somewhat unexpected. The option-adjusted spread on the Bloomberg Barclays US Corporate Index tightened 17 basis points (bps) to 106 over the three month period ending September 30, 2018. This compares to 93 bps at the beginning of the year, and 101 bps at the end of 3Q 2017. In the U.S. Treasury market, the benchmark 10-year yield increased from 2.85% on June 30, 2018 to 3.057% on September 30, 2018– after having traded as high as 3.101% and as low as 2.82% during the quarter.
Most of the spread retracement occurred during July, as strong earnings combined with solid economic data to foster a "risk on" tone. Interest rates moved higher, leading to increased demand as all-in-yields (UST rate plus credit spread) become more compelling. This positive technical was helped by a muted new issue calendar. Not surprisingly, given the rally, the best performing sectors tended to be those with higher spread beta and lower credit ratings. The July snap back was the strongest monthly excess return performance for the Bloomberg Barclays U.S. Corporate Index since April 2016, though total returns were hurt by the selloff in Treasuries.
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| | Alternatives Update 3rd Quarter 2018 |
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| Posted Under: Alternatives |
In the 3rd quarter, U.S. equity beta rewarded investors. "Buy risk," "buy on the dips," "buy growth", was the path to outperformance. Thanks to a strong earnings season, reasonably tame inflation, and a business-friendly administration, the S&P 500 Index was the clear winner among the various asset class returns in the third quarter (see Figure 1). Chinese equity markets continued to weaken amidst trade war rhetoric and successive rounds of tariffs. Tesla, Inc.'s CEO, Elon Musk's tweets and taunting of short sellers finally caught up with him. The U.S. Securities and Exchange Commission (SEC) fined both Tesla and Musk and required his removal as chairman because of his off-the-cuff comments proposing taking Tesla private.
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| | Third Quarter 2018 CEF Review |
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| Posted Under: CEFs |
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Third Quarter 2018 Overview
The average closed-end fund (CEF) managed a slight gain for the third quarter—up 0.51%, but remains lower on average by 2.12% year-to-date (YTD). Equity CEFs led the way in the quarter with an average gain of 1.52%. U.S. general equity funds were particularly strong, with the average fund up 4.07% for the quarter as they benefitted from the 7.71% total return gain the S&P 500 Index posted during the quarter. Taxable fixed income CEFs were up on average 1.30% during the quarter. Municipal CEFs continue to be hurt by the rise in both shortand long-term interest rates and finished the quarter with an average loss of 1.30%. The average municipal CEF is now lower by 4.84% YTD. Average discounts to net asset value (NAV) widened during the quarter to 6.57% from the 5.93% average which they had ended the second quarter with. They remain wider than the 4.84% discount the average CEF had as of the end of 2017. (Source: Morningstar and Bloomberg. All data is share price total return.)
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| | Senior Loan & High Yield Review - 3rd Quarter 2018 |
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| Posted Under: Senior Loan |
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Macro Overview
Interest rates remained in an upward trajectory during the quarter as the yield on the 10-year U.S. Treasury climbed from 2.86% at the end of the second quarter to 3.06% at the end of the third quarter. Increasing interest rates were a headwind for rate sensitive fixed income assets with the Bloomberg Barclays US Aggregate Bond Index, a good proxy for the overall bond market, up 2 basis points (bps) in the third quarter and down 1.60% year-to-date (YTD). Despite higher interest rates and anemic returns in rate sensitive fixed income, high-yield bonds and senior loans have performed well. The high-yield bond index was up 2.42% in the third quarter while the senior loan index was up 1.82%. Senior loans are now up 4.03% on the year, better than all other major fixed income markets, while high-yield bonds are up 2.50% (Exhibits 1 and 2).
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| | Two Paths for ETF Growth |
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| Posted Under: ETFs |
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Summary of Q2 2018 ETF Flows and Trends¹
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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.
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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.
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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.
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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.
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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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| | Emerging Market Local Currency Review - 2nd Quarter 2018 |
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| Posted Under: Emerging Markets |
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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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| | Municipal Update 2nd Quarter 2018 |
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| Posted Under: Municipal |
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First Half of 2018: Municipal Market Performance and Highlights
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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%.
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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.
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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%.
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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.
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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).
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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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| | Alternatives Update 2nd Quarter 2018 |
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| Posted Under: Alternatives |
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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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| | Second Quarter 2018 CEF Review |
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| Posted Under: CEFs |
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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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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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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients.
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