60/40 Strategic Allocation Portfolio, 3rd 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 60/40 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 objective, 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.
investment 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 exchange-traded funds (ETFs).
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 such funds.
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
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 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’
An investment in a portfolio containing small-cap
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 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
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 13 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.
For a discussion of additional risks of investing in the trust see the "Risk Factors"
section of the prospectus.
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 cyber security.