Investment strategies using ETFs

In today's financial marketplace, a well-maintained portfolio is vital to any investor's success. Investors are focusing on the fundamentals of sound investing and are realizing that "time in the market" is not the only factor that determines long-term success. Sound portfolio construction begins with aligning investment goals to appropriate investment strategies such as asset allocation, diversification, cost control and risk management and applying periodic portfolio rebalancing.

The flexibility provided by ETFs makes these instruments one of the most useful investment tools available for both individual and institutional investors. ETFs offer diversification, low expense ratios and tax efficiency in a flexible investment that can be adapted to suit a multitude of objectives. The benefits of investing in ETFs can be enhanced when using them strategically.

Asset allocation
There are many significant considerations when constructing an investment portfolio - your current financial situation, future needs for capital and your risk tolerance to name just a few. Investors have long recognized the importance of balancing risk and creating diversification by dividing assets among major asset classes such as cash, bonds, stocks, and real estate. ETFs provide a sophisticated means to efficiently gain exposure to market segments encompassing a wide range of asset classes, market capitalizations, styles and sectors. ETFs have made it possible for all investors to build tailored investment portfolios consistent with their financial needs, risk tolerance and investment horizon. Selecting an appropriate asset allocation strategy and conducting periodic reviews may help to achieve your long-term investment goals and provide the potential for above average returns while reducing risk.

Portfolio completion
An investor can use ETFs to fill a missing asset class in their allocation. Many portfolios might not have adequate exposure to certain sectors or market capitalization ranges. If, for example, your portfolio was underweighted in smallcap companies, you could purchase an ETF to gain the proper degree of exposure which is dictated by your asset allocation plan.

Tax loss harvesting
ETFs may provide an effective way for investors to realize a tax loss while maintaining wanted exposure to a market segment. Tax-loss harvesting is a common year-end strategy of selling a stock which is at a loss and buying an ETF that closely correlates to its sector, thereby keeping portfolio allocations intact.

Core and satellite portfolio structure
The strategy of investing in broad based assets that provide market matching returns as a core component in a portfolio, enhanced by satellite positions that are concentrated in specific market segments, has been part of investor's asset allocation plans for decades. This strategy considers your tolerance for risk and allows you to actively tailor the investments based on your specific asset allocation plan. With the wide variety of ETFs available today, investors can use ETFs effectively as both core and satellite components. Broad based ETFs can be used as the core of a portfolio and are complemented by sector, style or other specialty ETFs that are used for the satellite assets. And because of the ETF structure, investors are able to make changes easily which has a direct impact on risk management.

Diversification
Diversification is a risk-management practice that combines a variety of investments within a portfolio in an effort to reduce the overall volatility of the portfolio. Because many ETFs provide broad exposure to an entire asset class, they can be used to efficiently mitigate the risk of being over exposed to any one company or area of the market.

Hedging
ETFs have opened up risk management strategies for individual investors that were once available only to large institutions. They can be purchased on margin and sold short, even on a downtick, providing maximum trading flexibility. Listed options are available on some ETFs and offer opportunities for additional hedging or to increase income. It is important to note that substantial risks and higher costs may result from borrowing and short-selling ETFs. These strategies may not be suitable for all investors.

You should consider a fund's investment objectives, risks, and charges and expenses carefully before investing. Contact your financial advisor or call First Trust Portfolios L.P. at 1-800-621-1675 to request a prospectus, which contains this and other information about a fund. Read it carefully before you invest.

Risk considerations
A fund's shares will change in value, and you could lose money by investing in a fund. An investment in a fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. One of the principal risks of investing in a fund is market risk. Market risk is the risk that a particular stock owned by a fund, fund shares or stocks in general may fall in value.

You should anticipate that the value of the shares will decline, more or less, in correlation with any decline in the value of the index. A fund's return may not match the return of the index. A fund may not be fully invested at times. Securities held by a fund will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. A fund may invest in small capitalization and mid capitalization companies. Such companies may experience greater price volatility than larger, more established companies.

Investors buying or selling fund shares on the secondary market may incur brokerage commissions. Investors who sell fund shares may receive less than the share's net asset value. Unlike shares of open-end mutual funds, investors are generally not able to purchase ETF shares directly from the fund and individual ETF shares are not redeemable. However, specified large blocks of shares called "creation units" can be purchased from, or redeemed to, the fund.

The information contained in this document does not constitute tax advice. Please consult your tax advisor for specific information about your tax situation.