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Growth And Surging Popularity Of Unconstrained Bond Funds

By Hong Xie In the aftermath of the global financial crisis of 2007-2008, one noticeable trend in fixed income investment is the growth and popularity of unconstrained bond funds. They have generated strong interest in the investment industry due to the flexibility they offer in duration management and the broader investment universe. Because they are not managed against a specific benchmark, unconstrained bond funds may also pose challenges for investors in understanding and measuring their performance. The global financial crisis of 2007-2008 and the economic recession that followed prompted unprecedented quantitative easing monetary policies across many countries. Not only were short-term interest rates lowered to either zero or close to zero, but quantitative easing was also adopted in places such as the U.S., the U.K., the eurozone, and Japan to flatten the yield curve and keep long-term interest rates low. As the U.S. economy continues to recover and the Fed starts to increase interest rates, many investors have concerns about holding core fixed income products with high interest-rate risk in a rising-rate environment. It is this widespread market sentiment that has driven the surging popularity of unconstrained bond funds, which offer wide latitude to fund managers on duration management and investment selection. We use fund data from Morningstar to gauge the size and growth of unconstrained bond funds. In particular, we screen for funds categorized as “U.S. OE Nontraditional Bonds” by Morningstar, while excluding those with mandates in specific sectors or with duration constraints. As of November 2015, there were 122 open-ended mutual funds with total assets under management (AUM) of USD 140 billion in our data set, in comparison with 19 funds with AUM of USD 9 billion at the end of 2008 (see Exhibit 1). Even though the first fund started in 1969, it wasn’t until after the global financial crisis of 2007-2008 that unconstrained bond funds started gaining traction among investors. Exhibits 1 and 2 show the rapid growth of unconstrained bond funds since 2008 in terms of both AUM and number of funds. Disclosure: © S&P Dow Jones Indices LLC 2015. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to S&P DJI. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI and to see our full disclaimer, visit www.spdji.com/terms-of-use .

U.S. Broker-Dealer And Japan: 2 ETFs To Watch On Outsized Volume

In the last trading session, U.S. stocks ended on a weaker note thanks to renewed global growth concerns. Among the top ETFs, investors saw the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) go down 1.2%, the S PDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) lose 0.99% and the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) shed 1.44% on the day. Two more specialized ETFs are worth noting as both saw trading volume that was far outside of normal. In fact, both these funds experienced volume levels that were more than double their average for the most recent trading session. This could make these ETFs the ones to watch out for in the days ahead to see if this trend of extra-interest continues: iShares U.S. Broker-Dealers ETF (NYSEARCA: IAI ) : Volume 3.73 times average This U.S. broker-dealer ETF was under the microscope yesterday as nearly 417,000 shares moved hands. This compares to an average trading day of 117,000 shares and came as IAI lost about 3.3% in the session. The movement was due to the dovish Fed minutes as lower rates hamper the income for broking companies. However, the fund has a Zacks ETF Rank #3 (Hold). IAI was down about 3.8% in the past one-month period. iShares MSCI Japan ETF (NYSEARCA: EWJ ) : Volume 2.36 times average This Japan ETF was in focus yesterday as roughly 117.6 million shares moved hands on that day compared to an average of roughly 50.9 million. We also saw some share price movement as shares of EWJ lost 0.5%. The movement can largely be blamed on the strengthening of the yen against the dollar. It could have a big impact on Japan stocks that we find in this ETF portfolio. For the past one month, EWJ was down 3.4%. The fund currently has a Zacks ETF Rank #3 with a Medium risk outlook. Link to the original post on Zacks.com

3 Healthcare Funds To Buy On Biotech Rebound

After being beaten down during the first three months of the year, biotech stocks made a remarkable rebound over the past few days. Though the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) is still down 17% in the year-to-date frame, it posted an increase of 5.9% on Wednesday, witnessing the best percentage gain since March 12, 2009. In fact, the 7.9% rise in IBB over the past one-month period also propelled healthcare mutual funds, which gained 2.9% during the same period. Mutual funds from this category may be profitable for investors, who are looking to gain from this encouraging trend. Reasons for the Recent Surge Strong gains of 5% and 3.5% respectively in Pfizer Inc. (NYSE: PFE ) and Allergan plc (NYSE: AGN ) played an important role in lifting biotech stocks on Wednesday. The increase was prompted when the companies mutually called off their merger after tougher tax inversion rules were imposed by the U.S. Treasury Department and Internal Revenue Service. Leaving the deal behind, Allergan CEO Brent Saunders said that the company, “could act immediately if” it gets “the right opportunity with the right growth profile and the right strategic logic.” Meanwhile, it is now speculated that names of other UK-based firms like GlaxoSmithKline plc (NYSE: GSK ) are on Pfizer’s radar. Moreover, a surge of nearly 17% in shares of Edwards Lifesciences Corp. (NYSE: EW ) gave a boost to this sector. According to the company, data from the trial revealed that a procedure which uses its SAPIEN 3 valve shows better results than open heart procedures for certain patients. What’s Ahead? In spite of the recent surge, some of the concerns that affected the performance of biotech stocks at the start of 2016 may continue to impact the sector in the near future. Calls for reducing the prices of several drugs had played an important role in dragging down the sector. Hillary Clinton’s comments on the prohibitive pricing of certain medications drew much attention last year, weighing down on the sector’s stocks. Moreover, the U.S. Treasury Department’s adaptation of new rules to contain inversion-related deals may lower the volume of overseas merger and acquisition deals in the near term. Moreover, mixed earnings results during the fourth quarter affected the sector to quite an extent. Also, continued decline in the first-quarter earnings forecast is likely to hurt the sector’s performance in the days ahead. First-quarter earnings from the healthcare sector are anticipated to grow only 0.6% from the year-ago level compared with 9.3% growth witnessed in the previous quarter. Moreover, the year-on-year revenue growth rate is projected to decline to 8.8%, lower than the fourth quarter’s growth pace of 9.7%. However, an innovative product pipeline, product approvals and impressive performances by key products may act as growth catalysts and help the sector to overcome the above-mentioned concerns. Moreover, favorable valuation can make smaller companies within the sector attractive bets for acquisition. Separately, positive results from clinical trials also lift the sector’s stocks. They are difficult to predict, but come as welcome surprises for investors. 3 Healthcare Funds Picks Given this strong recovery, we have highlighted three healthcare mutual funds that either have a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. These funds have encouraging one-month and three-year annualized returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load. Delaware Healthcare Fund I (MUTF: DLHIX ) invests a large chunk of its assets in equity securities of companies that are engaged in operations such as production, development and of products and services related to healthcare sector. DLHIX is a non-diversified fund. Along with a Zacks Mutual Fund Rank #1, DLHIX has one-month and three-year annualized returns of 5.9% and 16.8%, respectively. Annual expense ratio of 1.11% is lower than the category average of 1.35%. Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) seeks growth of capital. FBIOX invests the lion’s share of its assets in companies primarily involved in the research, development, manufacture, and distribution of various biotechnological products. The fund invests in securities of companies throughout the globe. Along with a Zacks Mutual Fund Rank #2, FBIOX has one-month and three-year annualized returns of 5.1% and 16.8%, respectively. Annual expense ratio of 0.72% is lower than the category average of 1.35%. Live Oak Health Sciences Fund (MUTF: LOGSX ) invests the majority of its assets in common stocks of healthcare companies or those related to medicine and life sciences. Though LOGSX primarily focuses on acquiring domestic securities, it may allocate a small portion of its assets in securities of foreign firms and ADRs. Along with a Zacks Mutual Fund Rank #2, LOGSX has one-month and three-year annualized returns of 3.9% and 15.9%, respectively. Annual expense ratio of 1.08% is lower than the category average of 1.35%. Link to the original post on Zacks.com