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  Strong Demand for Municipal Bond ETFs and Mutual Funds in 2019
Posted Under: ETFs
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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Posted on Monday, May 20, 2019 @ 3:12 PM • Post Link Share: 
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  Robotics, Artificial Intelligence, and the Fourth Industrial Revolution
Posted Under: ETFs
Summary of Q1 2019 ETF Flows and Trends¹
  • 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.
  • 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%.
  • 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.
  • 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.
  • 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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Posted on Thursday, May 2, 2019 @ 9:01 AM • Post Link Share: 
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  First Quarter 2019 CEF Review
Posted Under: CEFs
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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Posted on Wednesday, April 24, 2019 @ 1:42 PM • Post Link Share: 
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  Alternatives Update 1st Quarter 2019
Posted Under: Alternatives
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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Posted on Tuesday, April 23, 2019 @ 2:06 PM • Post Link Share: 
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  Biotechnology Update
Posted Under: ETFs
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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Posted on Monday, February 25, 2019 @ 8:22 AM • Post Link Share: 
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  Consider the Less Expensive Defensive Trade
Posted Under: ETFs
Summary of 2018 ETF Flows and Trends¹

  • 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.
  • 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%).
  • 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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Posted on Tuesday, February 12, 2019 @ 8:19 AM • Post Link Share: 
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  Alternatives Update 4th Quarter 2018
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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Posted on Monday, January 28, 2019 @ 2:10 PM • Post Link Share: 
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  Fourth Quarter 2018 CEF Review
Posted Under: CEFs
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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Posted on Monday, January 28, 2019 @ 10:26 AM • Post Link Share: 
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  Did ETFs Cause the Q418 Sell-Off?
Posted Under: ETFs
When equity markets have sold off over the past decade, many have been quick to point at exchange-traded funds (ETFs) as the possible culprit (remember the "flash crash"!?).  Plenty of active mutual fund managers have ample incentives to characterize ETFs as problematic, especially while facing consistent outflows, as ETFs continue to gobble up market share.  Thus, it's not uncommon for investment advisors to encounter clients that have had seeds of doubt planted about whether or not ETFs really are to blame when volatility picks up, or equities sell off.

Among such investors, these concerns may have been further stoked by an unexpected spike in volatility and equity market sell-off in Q418.  Surely, ETFs were to blame as nervous investors exacerbated the downturn by selling their ETFs into a declining market, right!? Nope.  If anything, the data points in the opposite direction. In Q4, US equity and sector ETFs had over $31 billion of net inflows. Even in December, as the S&P 500 Index had its steepest decline, US equity and sector ETFs had over $13 billion of net inflows. Meanwhile, traditional US equity and sector mutual funds had nearly $38 billion of net outflows in Q4.  If anyone was selling into a falling market, it was mutual fund investors!  However, before anyone starts blaming the Q4 market decline on traditional mutual funds, keep in mind that this is nothing new.  In fact, traditional equity mutual funds had net outflows for 8 of the prior 9 months in 2018, averaging over$11 billion per month.

Data source: Morningstar Direct.

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Posted on Wednesday, January 23, 2019 @ 1:02 PM • Post Link Share: 
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  Senior Loan & High Yield Review - 4th Quarter 2018
Posted Under: Senior Loan
Macro Overview
Mounting fears regarding the pace of interest rate hikes by the Federal Reserve, increased tensions between the U.S. and China over trade, and concerns over slowing global growth led to volatile conditions in both equity and fixed income markets during the final quarter of 2018. These fears led equities to fall 13.52% in the quarter, as measured by the S&P 500. The decline in equities during the quarter induced selling across a wide spectrum of asset classes, including high-yield bonds, which fell 4.64% and senior loans which were down 3.42%. The risk-off sentiment led to a flight to quality, notably into U.S. Treasury Bonds. As Treasury's increased in value, interest rates declined. The yield on the 10 Year U.S. Treasury Bond had its first quarterly decline since the second quarter of 2017 as the yield moved from 3.06% at the end of the third quarter to 2.68% at the end of the fourth quarter. Despite the volatility in the fourth quarter, senior loans outperformed most fixed income asset classes in 2018. Loans finished the year marginally positive at 0.47% (Exhibit 1) while high-yield bonds were down 2.25% (Exhibit 2), investment grade corporate bonds were down 2.24% and the Bloomberg Barclays Aggregate Index, a good proxy for the overall bond market, finished the year up one basis point.

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Posted on Friday, January 11, 2019 @ 12:44 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
Emerging Market Local Currency Review - 3rd Quarter 2018
GICS Sector Reshuffle Exacerbates Top-Heavy Concentration For Certain Sectors
U.S. Investment Grade Credit Investor Update - 3rd Quarter 2018
Alternatives Update 3rd Quarter 2018
Third Quarter 2018 CEF Review
Senior Loan & High Yield Review - 3rd Quarter 2018
Two Paths for ETF Growth
Emerging Market Local Currency Review - 2nd Quarter 2018
Municipal Update 2nd Quarter 2018
Alternatives Update 2nd Quarter 2018
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