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  High-Yield Bond Performance as Spreads Recover
Posted Under: Senior Loan
Since the option-adjusted spread (OAS) of high-yield bonds reached extreme levels in late March from COVID-19 fears, as represented by the ICE BofA US High-Yield Constrained Index (HUC0), high-yield bond spreads have experienced a dramatic recovery from a wide of 1,087 bps on March 23, 2020, to the current level of 631 bps, as of June 25, 2020. Naturally, the question investors must be asking is, "Have I missed it?". We believe the answer is, "No". 
While high-yield bond OAS has improved since the dramatic dislocation in March, spreads continue to remain above their long-term average of 552 bps. In addition, spreads remain 271 bps wider than the 360 bps at the beginning of the year. Empirically, we can evaluate how investors would have fared historically if entering the market under similar circumstances. There have been 10 similar occurrences prior to the COVID-19 pandemic when high-yield bond spreads ended the month above 600 bps AFTER a dislocation in spreads. Said differently, when high-yield bond spreads widened beyond 600 bps and subsequently recovered to 600 bps, the following 12-month holding period average return was 9.27% and the median return was 10.71%. Moreover, in none of those 10 instances would an investor have experienced a loss. Furthermore, HUC0 exhibited strong returns over a 24-month holding period with an annualized average return of 8.12% and a median annualized return of 9.36%. In only one instance out of the 10 periods would an investor have experienced a loss. That period was from November 1998 to November 2000 with a -2.64% average annualized return. 
In summary, we believe a rapid tightening in high-yield bond OAS should be interpreted as validation for a continued recovery. Conversely, when the high-yield bond OAS widened beyond 600 bps but didn't recover back to 600 bps, it tended to suggest a long period of volatility, as evidenced in the graph below over the period of 2000-2002, when the spreads remained well wide of 600 bps.

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Posted on Tuesday, June 30, 2020 @ 10:32 AM • Post Link Share: 
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  The Post-Pandemic Opportunity for Biotech
Posted Under: ETFs
As large swaths of the US economy were being shuttered earlier this year to help mitigate the fallout from the coronavirus (COVID-19) pandemic, the biotechnology industry unleashed its capacity for innovation, creating new methods for testing, therapeutic treatments, and vaccines for COVID-19. Progress in these areas has been achieved at an unprecedented pace, and numerous clinical trials are currently ongoing. As the economy reopens, many are depending on the success of newly created therapeutics and vaccines to save lives and avoid future lockdowns. Indeed, the last few months have demonstrated the critical importance of a robust biotechnology industry.

As an investment theme, biotechnology has also worked relatively well during the crisis; the NYSE Arca Biotechnology Index reached a new all-time high in June. Nonetheless, we believe the industry's best days may still lie ahead. In our view, the events of the past few months help to improve the long-term outlook for these stocks, which may benefit from more efficient regulation, industry consolidation, and a rehabilitated public image.

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Posted on Friday, June 12, 2020 @ 10:04 AM • Post Link Share: 
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  Asset Flows Monitor June 2020 Edition
Posted Under: ETFs

 
  • US-listed ETFs had $28.5 billion in net inflows in May, bringing trailing 12-month net inflows to $376.3 billion. Total ETF assets under management increased to $4.17 trillion.
  • Fixed income ETFs had the strongest net inflows in May (+$32.2 billion), bringing trailing 12-month inflows to $169.3 billion. On the other hand, equity ETFs had net outflows in May (-$10.1 billion), bringing trailing 12-month inflows to $168.0 billion. Commodities ETFs had net inflows in May (+$6.3 billion) for the fifth month in a row, bringing trailing 12-month net inflows to $38.6 billion.

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Posted on Wednesday, June 3, 2020 @ 3:11 PM • Post Link Share: 
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  As Dividends Become Scarcer, Will they Become More Valued?
Posted Under: ETFs
In the years that followed the 2008 financial crisis, ultra-low interest rates led many investors to seek income from sources outside the bond market, such as dividend-paying stocks. As interest rates have plummeted this year, we believe demand for dividend payers may swell once again. However, the COVID-19 crisis has led several companies to cut dividends. In our view, stocks that can maintain strong dividend policies may grow more attractive, as income-oriented investors chase fewer dividend payers. We believe dividend durability may be a key driver of performance for dividend ETFs in the months ahead.

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Posted on Wednesday, May 13, 2020 @ 8:59 AM • Post Link Share: 
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  Asset Flows Monitor May 2020 Edition

 
  • US-listed ETFs had $46.3 billion in net inflows in April, bringing 12-month total net inflows to $341.2 billion. Total ETF assets under management increased to $4.05 trillion.

  • Fixed income ETFs had the strongest net inflows in April (+$23.1 billion), rebounding from the largest net outflows in March (-$21.7 billion). Commodities ETFs had the second largest net inflows in April (+$12.9 billion) for the second month in a row, as $7.8 billion flowed into precious metals ETFs and $4.8 billion into energy ETFs. Equity ETFs had the third largest net inflows in April (+$9.9 billion), yet maintained the highest total net inflows over the past 3 months (+$25.6 billion).


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Posted on Thursday, May 7, 2020 @ 1:41 PM • Post Link Share: 
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  Alternatives Update 1st Quarter 2020
Posted Under: Alternatives
All charts shown herein are for illustrative purposes only and not indicative of any investment. The performance illustrations exclude the effects of taxes and brokerage commissions or other expenses incurred when investing. Past performance is not indicative of future results and there can be no assurance past trends will continue in the future. An investor cannot invest directly in an index. See last page for definitions of asset class indexes and other terms discussed herein.  It was nearly three years ago that then Federal Reserve Chair Janet Yellen said she did not believe there would likely be another financial crisis in her lifetime due to banking reforms and actions taken by the Federal Reserve to enhance financial stability. Unfortunately, that statement seems a touch hubristic given recent events. The first quarter of 2020 was a jarring experience for several generations of investors. What began as a continuation of the longest bull market in U.S. history, ended with the fastest descent into a bear market ever. The catalyst was the now infamous COVID-19 coronavirus pandemic. As markets frayed, the Federal Reserve's balance sheet exploded (see Figure 1). There were a multitude of unprecedented events firing off in succession. The opening salvo was a preemptive rate cut on March 3 of 50 basis points (bps) prior to the scheduled Federal Open Market Committee (FOMC) meeting on March 17-18. On March 15, the Federal Reserve (Fed) dropped rates 100 bps to near zero and cancelled the regularly scheduled meeting. Congress initiated multiple stimulus packages including the largest ever passed. There were liquidity blowouts requiring Federal Reserve intervention in high-yield bonds, municipal bonds, and mortgages. Liquidity injections of never seen before levels by the Fed included buying corporate bond ETFs, and widespread talk of a $2 trillion infrastructure package with more possibly to come.

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Posted on Friday, April 24, 2020 @ 8:53 AM • Post Link Share: 
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  Closed-end Fund Review - First Quarter 2020
Posted Under: CEFs
FIRST QUARTER 2020 OVERVIEW
It was an extremely challenging quarter for the closed-end fund (CEF) marketplace. The average fund was lower by 23.46%. All the broad CEF categories tracked by Morningstar were lower for the quarter. The average equity CEF was lower by 36.24%, taxable fixed-income funds were lower by 23.02%, all fixed-income funds were down by 15.77% and municipal CEFs declined on average 7.25% (source: Morningstar. All performance is based on share price total return).
Concerns about the Coronavirus and the significant negative impact it will have on the global economy led to a severe sell-off across most equity and credit markets.
  • The S&P 500 Index declined 19.60% during the first quarter.
  • The ICE BofA High-Yield Bond Index declined 13.13%.
  • The S&P/LSTA Leveraged Loan Index dropped 13.05%.
  • The ICE BofA Preferreds Index was lower by 8.83%.
  • The ICE BofA 7-12 Yr Municipal Index declined 0.78%.
The negative performance across many key equity and fixed-income asset classes, the use of leverage by many CEFs and discount widening all helped to contribute to the very challenging quarter for CEFs (source: Bloomberg, as of 3/31/20. Index performance is based on total returns).

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Posted on Thursday, April 23, 2020 @ 8:42 AM • Post Link Share: 
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  Asset Flows Monitor April 2020 Edition
Posted Under: ETFs

 
  • US-listed ETFs had $9.7 billion in net outflows in March, bringing 12-month total net inflows to $322.8 billion. Negative performance from many ETFs brought total assets under management down to $3.61 trillion.
  • Despite being a challenging month for performance, equity ETFs had $9.8 billion in net inflows in March. On the other hand, fixed income ETFs had $21.7 billion in net outflows. Overall, net asset flows for both equity ETFs (+$45.0 billion) and fixed income ETFs (+$14.6 billion) remained positive during the first quarter of 2020.

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Posted on Friday, April 3, 2020 @ 3:32 PM • Post Link Share: 
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  Cybersecurity is More Essential Than Ever
Posted Under: ETFs
Thesis: The COVID-19 crisis has shed new light on our understanding of "essential" products and services.  As thousands of people have begun to work remotely for the first time, the importance of a well-functioning and secure internet ecosystem has been viscerally reinforced.  In the near-term, we expect spending on cybersecurity to remain resilient as working remotely has become the lifeblood of many companies.  Longer-term, we believe the critical importance of cybersecurity will spur continued investment by companies and government agencies seeking to avoid potential disruptions in the future.

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Posted on Thursday, March 26, 2020 @ 10:02 AM • Post Link Share: 
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  Biotech Improves its Long-term Position by Providing Hope Today
Posted Under: ETFs
Thesis: Coming into 2020, health care sector stocks were dampened by concerns that the sector was an easy target for the populist impulses of both political parties in an election year, and that some version of price controls could follow.  However, as the nation pulls together to battle COVID-19, health care stocks—especially biotechnology—are taking a leading role in providing solutions.  In the near term, hopes of producing anti-viral treatments, vaccines, and testing kits for the COVID-19 virus will buoy these stocks.  But perhaps more importantly, in the long-run, we believe biotechnology and other health care stocks will become less likely political targets, having proven their importance to society, which may support the multiple expansion that has been lacking over the past few years.

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Posted on Friday, March 20, 2020 @ 2:06 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
Asset Flows Monitor March 2020 Edition
Cybersecurity Comes to the Forefront in 2020
Asset Flows Monitor
New Highs Beget New Highs
ETF Data Watch: Asset Flows Monitor January 2020 Edition
Superior Tax-Efficiency Supports Continued Migration to ETFs
Alternatives Update 3rd Quarter 2019
Third Quarter 2019 CEF Review
ETFs with the Potential for Capturing the "New Listing" Premium
Alternatives Update 2nd Quarter 2019
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