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 | Should Equity Investors Use Yield Curve Inversions as a Trading Signal? |
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| Posted Under: ETFs |
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On March 22, 2019, the 10-year US Treasury yield dipped below the 3-month US Treasury yield, marking the first inversion between these key rates since 2007. Concerns about yield curve inversions and their implication for economic growth have been widespread as the yield curve has flattened over the past several months. While nobody knows for certain what the future holds, it may be helpful to consider what an inverted yield curve has typically meant for equity investors over the past few decades.
Prior to the inversion on March 22nd, the spread between 10-year and 3-month US Treasury yields has gone negative (marking an inversion) on 8 separate occasions since 1978 (defining "new" inversions as those that have begun at least 3 months after the end of a prior inversion).
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| | Will the 5G Transition be the next Disruptive Innovation? |
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| Posted Under: ETFs |
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It's easy to take for granted many of the technological developments that have reshaped our world in recent decades. Major disruptive innovations, such as the internet and the smartphone, have proven to be catalysts for further innovation, improving living standards and reshaping entire industries. In our opinion, we may be at the edge of another inflection point in technological advancement with the transition to the fifth-generation of cellular networking technology, referred to as 5G, over the next decade. While winners and losers will undoubtedly emerge, we believe this transition may offer significant opportunity for investors.
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| | Strong Demand for Municipal Bond ETFs and Mutual Funds in 2019 |
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| Posted Under: ETFs |
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Demand for municipal bond exchange-traded funds (ETFs) and mutual funds reached record levels during the first four months of 2019. In fact, all four months individually ranked in the top 10 for monthly net inflows over the past 25 years (see Table 1 below). At first glance, strong demand for tax-free funds may seem counterintuitive following President Trump's tax reform legislation enacted in December 2017. However, we believe the specifics of tax reform, especially for high-tax states, combined with municipal bond supply dynamics and relatively strong fundamentals may continue to drive demand—and returns—for municipal bond ETFs and mutual funds.
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| | Robotics, Artificial Intelligence, and the Fourth Industrial Revolution |
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| Posted Under: ETFs |
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Summary of Q1 2019 ETF Flows and Trends¹
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Total US-listed ETF assets reached $3.81 trillion at the end of Q1 2019, a 10.3% year-over-year increase. Estimated net asset flows in Q1 2019 totaled $54 billion, a 31% drop from the prior four quarter average.
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Taxable Bond ETFs received the strongest estimated net inflows in Q1 2019, totaling $34 billion, bringing the category's year-over-year increase in total assets to over 20%. Municipal Bond ETFs received $1.1 billion in estimated net inflows in Q1 2019, increasing year-over-year assets by 26%.
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US Equity ETFs received the second highest estimated net inflows with $17 billion, bringing the category's year-over-year increase in total assets to 16%. The narrower Sector Equity ETFs category saw estimated net outflows of $5 billion, and was the only category with estimated net outflows in both Q4 2018 and Q1 2019.
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International Equity ETFs received $8 billion in estimated net inflows, although year-over-year assets in the category declined 3%, in light of negative performance.
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Commodities and Allocation ETFs had estimated net outflows of $0.7 billion and $1.0 billion, respectively, in Q1 2019.
¹ Source: Morningstar, as of 3/31/19. 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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| | First Quarter 2019 CEF Review |
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| Posted Under: CEFs |
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First Quarter 2019 Overview
After a very challenging fourth quarter of 2018 when the average closed-end fund (CEF) was lower by 8.7% and for the year was down 10.7%, CEFs staged a significant rally during the first quarter of 2019. The average fund was up 11.8% for the first quarter. It was a very broad-based rally with Equity CEFs up 14.8%, Taxable Fixed-Income CEFs positive by 11.2% and Municipal CEFs up 9.4%. As discussed in the fourth quarter 2018 CEF commentary ( https://www.ftportfolios.com/Commentary/Insights/2019/1/28/fourth-quarter-2018), as tax loss selling ends and the calendar switches to the new year, price discovery takes hold as investors look to take advantage of the meaningful value and discounts to net asset value (NAV) that was created during the fourth quarter sell-off. That is, indeed, what we have seen occur in the first quarter. (Source: Morningstar. All data is share price total return).
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| | Alternatives Update 1st Quarter 2019 |
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| Posted Under: Alternatives |
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When Jerome Powell assumed the position of Chair of the Federal Reserve (Fed) in February of 2018, several questions lingered as to how he would guide the venerable institution. Would he be more of a hawk than his predecessor? Would he increase the independence of the Federal Open Market Committee (FOMC)? Would his investment banking background lead him to reduce the FOMC's market interventions in favor of a more "free market" approach? Would he accelerate balance sheet normalization? Would he dispel the notion of the "FED put" in the face of market volatility? Initially, it seemed that the answer to all the above questions was pointing towards, "yes."
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| | Biotechnology Update |
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| Posted Under: ETFs |
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Despite some volatility along the way, biotechnology stocks have significantly outperformed the S&P 500 Index over the past couple years, a trend that began in earnest after the surprise results of the 2016 elections. Since then (11/8/2016 – 1/31/2019), the First Trust NYSE Arca Biotechnology Index Fund (FBT) has posted a cumulative return of 60%, outperforming the S&P 500 Index by 28%. Below is an update to an article we wrote last year on some of the trends in the biotechnology industry that we believe may contribute to continued outperformance looking forward.
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| | Consider the Less Expensive Defensive Trade |
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| Posted Under: ETFs |
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Summary of 2018 ETF Flows and Trends¹
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Total US-listed ETF assets dropped to $3.40 trillion at the end of 2018, a -1.2% decline from the end of 2017. Total estimated net flows for the year were $313 billion, roughly $152 billion slower than 2017's record-setting flows. The slight dip in assets was due to performance, not capital flows.
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Total assets increased in four ETF categories, including Municipal Bond ETFs (+21.3%), Taxable Bond ETFs (+12.4%), Allocation ETFs (+0.8%), and US Equity ETFs (+0.4%).
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US Equity ETFs had the strongest estimated net inflows in 2018 (+$143 billion), followed by Taxable Bond ETFs (+$91 billion), and International Equity ETFs (+$60 billion). No ETF category had estimated net outflows in 2018.
¹ Source: Morningstar, as of 12/31/18. 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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| | Alternatives Update 4th Quarter 2018 |
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| Posted Under: Alternatives |
In the 4th quarter, U.S. equity beta went from highly desired to migraine inducing. There was a spike in risk aversion as investors dumped equities (growth stocks and small caps in particular), preferring the safe haven of bonds and precious metals (see Figure 1). Trade tensions with China and the potential global ramifications, worries of an overly aggressive Federal Reserve, the appearance of downward earnings revisions, and President Trump threatening to shut down the government over border wall funding all contributed to negative sentiment in the quarter. Growth worries were accompanied by spikes in volatility, widening credit spreads, and increasing chatter that the bull market in equities/risk assets was ending. While one quarter hardly makes a trend, there is concern about what happens when a generation of investors trained to "buy the dip" and algorithms created in a zero interest rate, low volatility biome, grapple with the curtailment of Central Bank supported capital markets and a new volatility regime. While hardly canon, the New York Fed's recession model jumped significantly in the quarter, putting the probability of a recession in the next 12 months at over 20% (see Figure 2).
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| | Fourth Quarter 2018 CEF Review |
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| Posted Under: CEFs |
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Fourth Quarter and 2018 Overview
The fourth quarter was a very difficult one for the closed-end fund (CEF) marketplace. The average CEF was lower by 8.74% for the three-month period ended on 12/31/18. The sell-off during the fourth quarter helped contribute to what turned out to be an overall negative one for the average CEF in 2018. The average CEF was lower by 10.73% for the year. It was a broad sell-off as, on average, both equity and fixed-income CEFs were lower for the year. Equity CEFs were down 17.94%. Taxable fixed-income funds were weaker by 6.76%, while Municipal CEFs were lower by 5.95% for the year. (Source: Morningstar. All data is share price total return.)
As is often the case, there were many varying factors which impacted the performance of equity and fixedincome CEFs, but clearly the negative performance for most U.S. and international equity indices hurt equity CEFs. Indeed, the MSCI All-Country World Ex US Index was down 16.42% for the year while the S&P 500 Index was lower by 4.39% during 2018. Rising short- and long-term interest rates hurt municipal CEFs, while many credit-sensitive taxable fixed-income CEFs were negatively impacted by investor fears that the global economy was slowing down. The BofAML Global Corporate Index was weaker by 3.46% for the year. (Source: Bloomberg)
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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, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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