Core Three Closed-End Allocation, Series 39
The Core Three Closed-End Allocation Portfolio is a professionally selected unit investment trust which
seeks to provide diversification among federally tax-exempt municipal bond closed-end funds (CEFs),
senior loan and limited duration CEFs, and domestic equity CEFs of which no individual sector will
represent more than approximately 30%. We believe that investing in municipal CEFs has the potential
to provide a good balance when combined with both credit-sensitive funds and equity funds. Because
different areas of the market follow different cycles and react differently to changes in global economies
and interest rates, we believe spreading assets across this spectrum of securities has the potential to
reduce the overall risk of the portfolio.
Consider These Factors
- Because of their low correlation to many other fixed-income and equity assets, municipal bonds can
also provide diversification benefits within an investor’s portfolio.
- While senior loans are generally loans which have been made to companies whose debt is typically rated
below investment grade, they are senior in the asset structure of a company and historical recovery rates
in the event of a default tend to be much higher relative to junior high-yield corporate debt.
- The interest paid on a senior loan resets every 30-90 days based on prevailing short-term interest rates.
Therefore, should short-term rates move higher, investors in senior loans would receive a higher
income stream due to the floating rate nature of the interest on the loans. Unlike securities with a fixed
rate coupon, a senior loan’s floating rate feature provides a natural hedge against rising interest rates.
- We believe there is potential for interest rates to move higher which makes limited duration closed-end
funds attractive because they provide investors with high income but with less interest rate sensitivity.
The duration of a bond is a measure of its price sensitivity to interest rate movements based on the
weighted average term to maturity of its interest and principal cash flows. Historically, these funds
have tended to hold up better in rising interest rate environments than closed-end funds which invest
in longer duration bonds.
- We believe the moderate growth in the U.S. economy continues to create a good backdrop for domestic
equity closed-end funds.
Why Closed-End Funds?
Since closed-end funds maintain a relatively fixed pool of investment capital, portfolio managers are
better able to adhere to their investment philosophies through greater flexibility and control. In addition,
closed-end funds don’t have to manage fund liquidity to meet potentially large redemptions.
Because they are not subjected to cash inflows and outflows, which can dilute distributions over time,
closed-end funds can generally provide a more stable income stream than other managed investment
products. However, stable income cannot be assured.
This unit investment trust seeks current monthly income, with capital appreciation as
a secondary objective. There is, however, no assurance that the objectives of the
portfolio will be achieved.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
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.
An investment in this unmanaged unit investment trust should be
made with an understanding of the risks associated with an investment in a portfolio of closed-end
funds. Closed-end funds 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 the funds or their underlying investments change. Shares of closed-end funds
frequently trade at a discount to their net asset value in the secondary market and the net asset
value of closed-end fund shares may decrease. Certain closed-end funds in which the portfolio
invests employ the use of leverage, which increases the volatility of such funds.
Certain of the closed-end funds invest in common stocks. Common stocks are subject to 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.
Certain of the closed-end funds 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 closed-end funds invest in investment grade securities. Investment grade securities
are subject to numerous risks including higher interest rates, economic recession, deterioration of
the investment grade bond market or investors’ perception thereof, possible downgrades and
defaults of interest and/or principal.
Certain of the closed-end funds invest in municipal bonds. Municipal bonds are subject to
numerous risks, including higher interest rates, economic recession, deterioration of the municipal
bond market, possible downgrades and defaults of interest and/or principal. Certain distributions
paid by certain funds may be subject to federal income taxes. In addition, a portion of the income
may be subject to the alternative minimum tax.
Certain of the closed-end funds 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 closed-end funds invest in limited duration bonds. Limited duration bonds are
subject to interest rate risk, which is the risk that the value of a security will fall if interest rates
increase. While limited duration bonds are generally subject to less interest rate sensitivity than
longer duration bonds, there can be no assurance that interest rates will not rise during the life of
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 closed-end funds invest in call
options. Options are subject to various risks
including that their value may be adversely
affected if the market for the option becomes
less liquid or smaller. In addition, options will
be affected by changes in the value and
dividend rates of the stock subject to the
option, an increase in interest rates, a change
in the actual and perceived volatility of the
stock market and the common stock and the
remaining time to expiration.
Certain of the closed-end funds invest in senior
loans. The yield on closed-end funds 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 closed-end funds invest in
securities issued by foreign issuers. Such
securities are subject to certain risks including
currency and interest rate fluctuations,
nationalization or other adverse political or
economic developments, lack of liquidity of
certain foreign markets, withholding, the lack
of adequate financial information, and
exchange control restrictions impacting
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. The markets for
credit instruments, including municipal
securities, have experienced periods of
extreme illiquidity and volatility.
This UIT is a buy and hold strategy and
investors should consider their ability to hold
the trust until maturity. There may be tax
consequences unless units are purchased in an
IRA or other qualified plan.
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
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 the prospectus.