40/60 Strategic Allocation Portfolio, 4th Quarter 2019 Series
Investors have long recognized the importance of balancing risk and creating diversification by
dividing assets among major asset categories such as stocks and bonds. Finding the right mix of
investments is a key factor to successful investing. Because different investments often react
differently to economic and market changes, diversifying among investments that focus on
different areas of the market primarily helps to reduce volatility and also has the potential to
enhance your returns.
We believe there are three hallmarks to a successful long-term investment plan-asset
allocation, diversification, and rebalancing. The 40/60 Strategic Allocation Portfolio is a unit
investment trust that has been developed to address these needs. It invests in a fixed portfolio
of common stocks and exchange-traded funds (ETFs) which are selected by applying our
disciplined investment process. It provides investors with asset allocation, diversification, and
an annual rebalancing opportunity through a single investment.
Consider The Potential Benefits Of Our Investing Process
- Complete portfolio transparency - Individual portfolio holdings and their weightings are
- Low cash positions so more of your money is put to work.
- "Style pure" portfolios - Each component of the allocation contains securities selected
specifically for the stated style and investment objective of its asset class, ensuring that the
portfolio is “style pure” on the initial date of deposit.
- No overlap - When constructing the portfolio we select a unique set of securities for each
asset class within the portfolio ensuring that there is no overlap. Avoiding overlap is a common
obstacle when building an allocation on one’s own.
- Diversification, discipline, and a periodic rebalancing opportunity helping to decrease volatility
and potentially increase returns.
A Comprehensive Approach to Security Selection
Effective asset allocation requires combining assets with low correlations-that is, those that have performed differently over varying market conditions. Investing in assets with low to negative
correlation can reduce the overall volatility and risk within your portfolio and may also help to improve portfolio performance. We apply a disciplined and comprehensive valuation process to select
securities across assets of varying sizes, styles, countries, and sectors, including those that have had relatively lower correlation with one another.
Common Stock Selection Process
Because stock prices are subject to factors that can make them deviate from a company’s true value, we believe
evaluating each company based on time-tested fundamental measures is key to achieving a higher rate of
long-term success. Our approach to selecting stocks is based on a proprietary rules-based selection process
which is consistently applied. This process embodies key elements of our investment philosophy by focusing on
financial measures that are least susceptible to accounting distortions and erroneous corporate guidance.
When selecting stocks for the portfolio, we apply a model which analyzes large-cap, mid-cap, small-cap, and
international stocks to assess valuations based on multiple risk, value, and growth factors. Our goal is to
identify stocks which exhibit the fundamental characteristics that enable them to provide the greatest
potential for capital appreciation. This process is unique and represents a critical point of differentiation from
indexing and other management styles.
Fixed Income ETF Selection Processs
For the fixed income portion of the portfolio we include ETFs
which invest in a variety of fixed income securities. Incorporating
ETFs which invest in a broad range of fixed income securities
results in a portfolio with a distinct risk/reward profile. ETFs
provide investors with several benefits, including diversification,
transparency, and tax efficiency, all of which align with the
principles upon which the portfolio is based.
We perform rigorous analysis and employ a disciplined portfolio
construction process when selecting ETFs to include in the
portfolio. Primarily, we prefer larger funds with higher trading
volumes and we look for funds with higher dividend yields, as
well as those that have shown a relatively consistent dividend
over time. We also consider a fund’s ability to continue its
dividend payment in the future.
The next step in our process is to consider current economic
events that might affect financial markets generally and/or the
ETF market, as well as news relating to a specific ETF, ETF group
or category of funds. Where relevant, we review the credit
quality of the underlying securities held by the funds. We prefer
to avoid funds with high expenses, as well as funds with higher
than average expense ratios relative to their peers.
We consult with our fixed income research teams and portfolio
management teams who understand the unique factors that
drive risk adjusted returns within various asset classes to
develop the overall strategic allocation of the fixed income
portfolio. Based on these factors, we create a broadly
diversified fixed income portfolio with an emphasis on higher
You should consider the portfolio'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 the portfolio. Read it carefully
before you invest.
in this unmanaged unit investment trust
should be made with an understanding of the
risks involved with an investment in a
portfolio of common stocks and exchangetraded
Common stocks are subject to certain risks, such
as an economic recession and the possible
deterioration of either the financial condition of
the issuers of the equity securities or the general
condition of the stock market.
ETFs are subject to various risks, including
management’s ability to meet the fund’s
investment objective, and to manage the fund’s
portfolio when the underlying securities are
redeemed or sold, during periods of market
turmoil and as investors’ perceptions regarding
ETFs or their underlying investments change.
Unlike open-end funds, which trade at prices
based on a current determination of the fund’s
net asset value, ETFs frequently trade at a
discount from their net asset value in the
secondary market. Certain ETFs may employ the
use of leverage, which increases the volatility of
An investment in a portfolio containing equity
securities of foreign issuers is subject to
additional risks, including currency fluctuations,
political risks, withholding, the lack of adequate
financial information, and exchange control
restrictions impacting foreign issuers. Risks
associated with investing in foreign securities
may be more pronounced in emerging markets
where the securities markets are substantially
smaller, less developed, less liquid, less
regulated, and more volatile than the U.S. and
developed foreign markets.
All of the ETFs invest in investment grade
securities. Investment grade securities are
subject to numerous risks including higher
interest rates, economic recession, deterioration
of the investment grade market or investors’
perception thereof, possible downgrades and
defaults of interest and/or principal.
Certain of the ETFs invest in floating-rate
securities. A floating-rate security is an
instrument in which the interest rate payable
on the obligation fluctuates on a periodic basis
based upon changes in an interest rate
benchmark. As a result, the yield on such a
security will generally decline in a falling
interest rate environment, causing the trust to
experience a reduction in the income it receives
from such securities. Certain of the floating-rate
securities pay interest based on LIBOR. Due to
the uncertainty regarding the future utilization
of LIBOR and the nature of any replacement
rate, the potential effect of a transition away
from LIBOR on a fund or the financial
instruments in which the fund invests cannot
yet be determined.
Certain of the ETFs invest in senior loans. The
yield on ETFs which invest in senior loans will
generally decline in a falling interest rate
environment and increase in a rising interest rate
environment. Senior loans are generally below
investment grade quality (“junk” bonds). An
investment in senior loans involves the risk that
the borrowers may default on their obligations
to pay principal or interest when due.
Certain of the ETFs invest in covenant-lite
loans which contain fewer or no maintenance
covenants and may hinder the ETF’s ability to
reprice credit risk and mitigate potential loss
especially during a downturn in the credit cycle.
An investment in a portfolio containing smallcap
and mid-cap companies is subject to
additional risks, as the share prices of small-cap
companies and certain mid-cap companies are
often more volatile than those of larger
companies due to several factors, including
limited trading volumes, products, financial
resources, management inexperience and less
publicly available information.
Certain of the ETFs invest in U.S. Treasury
obligations which are subject to numerous risks
including higher interest rates, economic
recession and deterioration of the bond market
or investors’ perceptions thereof.
Certain of the ETFs invest in mortgage-backed
securities. Rising interest rates tend to extend
the duration of mortgage-backed securities,
making them more sensitive to changes in
interest rates, and may reduce the market value
of the securities. In addition, mortgage-backed
securities are subject to prepayment risk, the risk
that borrowers may pay off their mortgages
sooner than expected, particularly when interest
Certain of the ETFs invest in high-yield securities
or “junk” bonds. Investing in high-yield securities
should be viewed as speculative and you should
review your ability to assume the risks
associated with investments which utilize such
securities. High-yield securities are subject to
numerous risks, including higher interest rates,
economic recession, deterioration of the junk
bond market, possible downgrades and defaults
of interest and/or principal. High-yield security
prices tend to fluctuate more than higher rated
securities and are affected by short-term credit
developments to a greater degree.
Certain of the ETFs invest in Treasury Inflation
Protected Securities (“TIPS”). TIPS are subject to
numerous risks including changes in interest
rates, economic recession and deterioration of
the bond market or investors’ perception thereof.
It is important to note that an investment can
be made in the underlying funds directly rather
than through the trust. These direct
investments can be made without paying the
trust’s sales charge, operating expenses and
The value of the securities held by the trust may
be subject to steep declines or increased
volatility due to changes in performance or
perception of the issuers.
Although this unit investment trust terminates
in approximately 15 months, the strategy is
long-term. Investors should consider their
ability to pursue investing in successive
portfolios, if available. There may be tax
consequences unless units are purchased in an
IRA or other qualified plan.
As the use of Internet technology has become
more prevalent in the course of business,
the trust has become more susceptible to
potential operational risks through breaches in
For a discussion of additional risks of investing
in the trust see the “Risk Factors” section of