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Value Seen In Muni Bond Closed-End Funds

Guest Paul Mazzilli, Independent Fund Consultant and Senior Advisor for S-Network Global Indexes, shares his thoughts on the current attractiveness of municipal bond closed-end funds: Their ability to use leverage very effectively. Wide discounts: share price dislocation versus net asset values. The potential impact of the Puerto Rico debt crisis. TOM BUTCHER: I’m here with Paul Mazzilli, Senior Advisor to S-Network Global Indexes. ETF providers often seek to partner with innovative third-party index developers like S-Network. Using his extensive knowledge of the closed-end fund market, Paul was instrumental in the development of the S-Network Municipal Bond Closed-End Fund Index. Paul, why may municipal bond closed-end funds be attractive for investors right now? PAUL MAZZILLI: There are three attractive aspects of municipal closed-end funds, all of which are working together right now. The first, as a closed-end fund, they have a set investment, they’re run by professional managers, and since they don’t have assets coming in and out like an open-end mutual fund, they can buy less-liquid, higher-yielding securities like private placements, non-rated bonds, and they’re not forced to sell bonds when people are seeking out liquidity. The next is a unique aspect of municipal closed-end funds. They have the ability to leverage. When a closed-end fund leverages, it will borrow against its own assets and buy more bonds. Here is a simple example: For a $100 million closed-end fund, the most it’s allowed to borrow is one-third leverage. It can borrow $50 million and buy another $50 million of bonds. The $100 million in assets becomes $150 million invested. If the underlying bonds are yielding 4%, the leveraged fund would yield 6%, approximately, before any incremental costs. You get almost a 50% increase given this ability to leverage one third. The final thing is that after closed-end funds are issued, they trade as stocks in the marketplace. Based on demand and supply, they can trade rich to their value [at a premium], or they can trade cheap to their value [at a discount]. Right now, they’re selling historically cheap at about a 10% average discount. The 25-year average discount is approximately 2%. So when you’re selling at a 10% discount, if you’re buying a dollar of assets for $0.90, if you had an asset yielding 10%, you’re actually getting an 11.1% yield on the money you’re putting up. This fact that they’re trading at a discount is happening right now because investors are fearful of the Fed raising rates. They are fearful of the equity markets, they’ve been raising cash since they’ve traded stocks, they’re selling them, they’re not looking at the underlying value, and it’s created a real buying opportunity. The discount has one other final advantage: If bonds were to sell off, but you’re buying at a 10% discount and it goes to a 5% discount, you actually could have a capital gain, even though the underlying bonds sell off. BUTCHER: Is the prospect of debt restructuring in Puerto Rico going to have any impact on municipal bond closed-end funds? MAZZILLI: Very good question. I think there are two different aspects. First, what does Puerto Rico do to the general municipal bond market? It is a significant issuer. It could have some impact in terms of how bonds trade. I personally believe a lot of that is already reflected in the market. Second is, what does it do to our index of municipal closed-end funds [S-Network Municipal Bond Closed-End Fund Index, CEFMX]? Our index currently has a very low exposure of about 0.43% to Puerto Rico. And that comes from two reasons. One: municipal closed-end funds tend to buy higher-quality funds, which would exclude Puerto Rico right now, or in the past. Two, we buy only national municipal closed-end funds, or our index represents only national municipal closed-end funds. And the national funds buy very little Puerto Rico exposure because they have a lot of other ways to diversify. BUTCHER: Paul, thank you very much for joining me today. MAZZILLI: Thank you. Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested. S-Network Municipal Bond Closed-End Fund Index is a rules based index intended to serve as a benchmark for closed-end funds listed in the US that are principally engaged in asset management processes designed to produce federally tax-exempt annual yield.

Buy: The WisdomTree Japan Hedged Equity ETF

Summary An ETF that invests in dividend paying companies incorporated in Japan and listed on the Tokyo Stock Exchange. The end of 20 years of deflation in Japan makes Japanese equities profitable in the current economic state. Abe’s pledge to further lower the corporate tax will stimulate Japanese stock market. Overview of the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) The WisdomTree Japan Hedged Equity ETF is an exchange-traded fund incorporated in the USA. It is designed to “to provide exposure to the securities in Japan, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and the Japanese yen” (WisdomTree.com). The Index is designed to have higher returns than a similar non-currency hedged investment when the yen depreciates relative to the U.S. dollar. Conversely, the index is designed to have lower returns if the yen strengthens against the U.S. dollar. The Fund invests in dividend paying Japan-incorporated companies that derive less than 80% of their revenue from sources in Japan. By excluding companies that derive 80% or more of their revenue from Japan, the index focuses more on companies with significant global revenue base (SEC). (click to enlarge) (Source: Bloomberg) (click to enlarge) (Source: Wisdomtree) The end of 20 years of Deflation Source: inflation.edu After a 20 year boom led by real estate and stocks during the 1970s and the 1980s, Japan experienced huge deflation for the next 20 years. Japan never recovered to the 2% annual inflation which is the hallmark of a proper financial system. However, as Shinzo Abe was elected Prime Minister of Japan, he initiated the “Three Arrows” policy. The policy entailed: (1) printing money to raise prices (2) buying $75B in bonds each month until March 2015 (3) targeting a 2% annual inflation rate (4) weakening the yen (5) increasing spending to create jobs and (6) delay inevitable tax increases. Why Japanese Equities Investing in Japan can be extremely profitable in the current economic state. In September 2015, the Nikkei 225 stock index experienced its biggest one day jump since 2008 because Prime Minister Abe pledged to further lower the corporate tax rate ( Bloomberg ). Compared to the ROE for Tokyo Stock Price Index in 2009, which was -4%, the ROE for TOPIX is now 8.6%. Hence investors should consider purchasing Japanese equities. This significant increase in ROE is indication of Japan’s economic growth potential. Moreover, Japan is still in the monetary easing mode. This quantitative easing program weakened the yen successfully, making the exportation of Japanese goods easier. (click to enlarge) JPYUSD Spot Exchange Rate (Source: Bloomberg) Abe latest pledge to further lower the corporate tax definitely supports Japanese equities. It increased, however, the debt of the country. Indeed, S&P recently downgraded Japan’s sovereign credit rating (marketrealist). Fortunately for Japan, the QE program is likely support stocks in the foreseeable future. Why DXJ DXJ is a perfect ETF that provides exposure to the Japanese equity market while hedging out the currency fluctuations so that the fund can focus purely on the performance of Japanese stocks. It is the best ETF for investors who believe that the yen will continue to weaken against the dollar but are also still seeking to scoop up Japanese equities. If the investor thinks that the yen will strengthen against the dollar, the fund will underperform other broad based Japanese ETF such as the iShares MSCI Japan ETF (NYSEARCA: EWJ ). (Source: etfdb.com as of 10/9/2015) As the yen weakened during the monetary easing mode and Abe recently lowered corporate taxes, it is apparent that DXJ will start to provide better returns than EWJ. Japan’s QE program will make the Japanese companies to export more goods. Since DXJ is composed of companies whose main revenue source is not Japan, DXJ will benefit from Abe’s policy. Symbol 1 Week 4 Week YTD 1 Year 3 Year 5 Year ProShares UltraShort MSCI Japan ETF (NYSEARCA: EWV ) -7.48% -6.89% -22.21% -26.23% -63.18% -68.52% DXJ 5.13% 3.31% 6.78% 8.19% 75.26% 58.00% EWJ 3.86% 3.07% 8.17% 9.40% 38.10% 27.77% SPDR Russell/Nomura PRIME Japan ETF ( JPP) 3.88% 3.53% 8.68% 10.40% 39.03% 31.10% iShares Japan Large-Cap ETF ( ITF) -2.40% -7.74% 6.10% 1.54% 36.45% 25.62% ProShares Ultra MSCI Japan ETF ( EZJ) 7.56% 7.16% 12.27% 13.61% 65.63% 27.51% Deutsche X-trackers MSCI Japan Hedged Equity ETF ( DBJP) 3.98% 2.79% 7.77% 20.34% 104.74% n/a Precidian MAXIS Nikkei 225 Index ETF ( NKY) 2.54% 1.96% 6.95% 8.76% 39.96% n/a (Source etfdb.com) The above graph is the historical data for Japan Equities ETF. DXJ has the second highest one week return and also the highest five year return, showing strength among other Japan ETFs. Symbol Inception ER Commission Free First Trust Japan AlphaDEX ETF ( FJP) 2011-04-19 0.80% Not Available WisdomTree Japan SmallCap Dividend ETF ( DFJ) 2006-06-16 0.58% E*TRADE WisdomTree Japan Hedged SmallCap Equity ETF ( DXJS) 2013-07-01 0.58% E*TRADE ITF 2001-10-23 0.50% Not Available NKY 2011-07-13 0.50% Not Available DXJ 2006-06-16 0.48% E*TRADE WisdomTree Japan Hedged Capital Goods ETF ( DXJC) 2014-04-08 0.48% Not Available WisdomTree Japan Hedged Financials ETF ( DXJF) 2014-04-08 0.48% E*TRADE WisdomTree Japan Hedged Health Care ETF ( DXJH) 2014-04-08 0.48% Not Available WisdomTree Japan Hedged Real Estate ETF (D XJR) 2014-04-08 0.48% E*TRADE WisdomTree Japan Hedged Tech, Media & Telecom ETF ( DXJT) 2014-04-08 0.48% Not Available EWJ 1996-03-12 0.48% 2 Platforms iShares Currency Hedged MSCI Japan ETF ( HEWJ) 2014-01-31 0.48% Not Available iShares MSCI Japan Small-Cap ETF ( SCJ) 2007-12-20 0.48% Not Available DBJP 2011-06-09 0.45% E*TRADE IQ 50 Percent Hedged FTSE Japan ETF ( HFXJ) 2015-07-22 0.45% Not Available WisdomTree Japan Dividend Growth Fund ( JDG) 2015-05-28 0.43% Not Available Deustche X-trackers Japan JPX-Nikkei 400 Equity ETF ( JPN) 2015-06-24 0.40% Not Available (Source etfdb.com) DXJ has an expense ratio of 0.48%, meaning that the fund will cost $4.8 in annual fees for every $1000 of investment, the average ETF however, carries an expense ratio of 0.44% (Morningstar Investment Research). DXJ costs more than the comparable Japanese ETF products and average ETFs. However, ETF implements strategy explained above is more efficient and cheaper than any other products. It is the perfect ETF for investors who are wary of currency changes but are bullish on Japanese stocks. Lastly, the Tokyo 2020 Olympic boost will definitely help Japan recover from the last two decades of economic torpor.

5 Ways To Play The Oil Rebound With ETFs

After a bumpy ride, oil regained its momentum with the start of the fourth quarter, indicating that the worst might be over for the commodity. All credit goes to improving demand/supply dynamics, which are rebuilding the lost confidence in the rebalancing of the oil market. This is especially true as Nymex crude is now comfortably hovering around the key threshold $50 per barrel, having gained 11% since the start of October, while Brent oil jumped 10.4%. Improving Fundamentals The steep gains came on the heels of dwindling supply, improving demand and an increased willingness by major oil producers to support the prolonged slump in the market. In particular, production in the U.S. and non-OPEC countries is declining, while global demand is increasing. U.S. oil output is expected to decline from 9.25 million barrels per day (bpd) in 2015 to 8.86 million bpd in 2016, while non-OPEC production will likely fall by 0.5 million bpd next year, the sharpest drop in more than two decades. The Energy Information Administration (EIA) expects global oil demand for 2016 to increase at the fastest pace in six years, suggesting that oversupply is easing faster than expected. Overall, the OPEC Secretary General, Abdalla Salem El-Badri, projects the oil market to be more balanced next year, as the gap in crude oil supply and demand will likely close in the third quarter of 2016. He foresees global demand to grow to 110 million bpd by 2040, from the current 93 million bpd. On the other hand, Qatar’s energy minister, Mohammed Al Sada, expects oil prices to have bottomed out and supplies from non-OPEC countries to turn negative next year, and the demand to rise to 30.5 million bpd from 29.3 million bpd in 2015. Further, a declining rig count and the weakening dollar of late are adding to the strength. Given the renewed optimism and signs that the oil market may begin to tighten, many investors have turned bullish and are seeking to tap this opportunity. For them, there are two ways to play this surge – one by directly playing through the futures contracts, and the other through equities. Equity ETFs Beating Futures Out of the two ways, equities are leading the current oil rally, given that the ultra-popular United States Oil ETF (NYSEARCA: USO ), providing exposure to the Nymex crude, gained 8.9% since the start of October, while an equity-based ETF like the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) is up 12.6%. This is because revenues and earnings of oil producers are closely tied to oil prices. Acting as a leveraged play, oil stocks tend to experience more gains or losses than oil itself in a rising or falling commodity market. As a result, equity-based oil ETFs will continue to be the real winners in the weeks ahead if oil price continues to rise. Investors can definitely look into the leveraged products in this space for outsized returns. Notably, leveraged ETFs could lead to huge gains in a very short time frame as compared to the simple products. Below, we have highlighted five equity-based leveraged ETFs that could be excellent picks for investors seeking to make large profits from the Energy space in a short span (see: all Leveraged Equity ETFs here ): Direxion Daily Energy Bull 3x Shares ETF (NYSEARCA: ERX ) This fund creates a triple (3x, or 300%) leveraged long position in the S&P Energy Select Sector Index, while charging 95 bps in fees a year. It is a popular and liquid option in the Energy leveraged space, with AUM of $557.2 million and average trading volume of 2.3 million shares. The ETF gained over 41% since the start of October. ProShares Ultra Oil & Gas ETF (NYSEARCA: DIG ) This ETF seeks to deliver twice (2x, or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $153.4 million in its asset base, with trades in a good volume of more than 186,000 shares per day, on average. The product is up 26.7% in the same time frame. Direxion Daily Natural Gas Related Bull 3x Shares ETF (NYSEARCA: GASL ) This product seeks to deliver thrice the daily performance of the ISE Revere Natural Gas Index, which derives a substantial portion of its revenues from the exploration and production of natural gas. The fund is often overlooked by the investors, as depicted by its AUM of $63.7 million and average daily trading of 161,000 shares. Its expense ratio comes in at 0.95%. The fund has delivered whopping returns of 104.1% since the start of October. Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares ETF (NYSEARCA: GUSH ) This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It debuted in the space only four months ago, and has accumulated $10 million in its asset base. The average daily volume is low at around 58,000 shares, while its expense ratio is 0.95%. The product has gained 74.6% in the same time frame. ProShares Ultra Oil & Gas Exploration & Production ETF (NYSEARCA: UOP ) This product also tracks the S&P Oil & Gas Exploration & Production Select Industry Index, but offers twice the returns of the daily performance with the same expense ratio as that of GUSH. It has AUM of just $2 million, and trades in a paltry volume of 1,000 shares. UOP is up over 49% so far this month. Bottom Line As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing, when combined with leverage, may make these products deviate significantly from the expected long-term performance figures. Still, for ETF investors who are bullish on oil for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world. Original Post