Diversified Fixed Income ETF Portfolio, Series 40
The Diversified Fixed Income ETF Portfolio is a unit investment trust which seeks to provide investors
with current monthly income and diversification across fixed income asset classes. To accomplish this,
the portfolio invests in a broad range of exchange-traded funds (ETFs) which are further diversified
among U.S. and foreign fixed income securities of various maturities and credit quality.
Instead of using multiple investments, investors may be able to fulfill the fixed income allocation within
their investment plans with this single, diversified portfolio.
What is Asset Allocation?
Asset allocation is the process of developing a diversified investment portfolio by combining different
assets in varying proportions. A portfolio’s long-term performance is determined primarily by the
distribution of dollars among asset classes. The asset allocation decision is one of the most important
decisions you will make as an investor. Studies have found that an asset allocation policy is the number
one factor in determining both the return and the risk of an investment portfolio.*
What is an ETF?
ETFs offer investors the opportunity to buy and sell an entire basket of securities with a single
transaction throughout the trading day. ETFs combine the characteristics of a mutual fund with the
convenience and trading flexibility of stocks. Below is a list of other ETF features.
- DIVERSIFICATION | ETFs hold a basket of securities which helps to mitigate single security
risk. It is important to note that diversification does not guarantee a profit or protect against loss.
- TRANSPARENCY | ETF holdings are available daily so investors know what they own.
- TAX EFFICIENCY | The ETF structure allows for increased tax efficiency.
- FULLY INVESTED | Unlike a traditional mutual fund, ETFs do not need to hold cash in order to
satisfy investor redemptions which allows them to better adhere to their investment objective.
This unit investment trust seeks a high rate of current monthly income by investing in
a diversified portfolio of fixed income ETFs; however, there is no assurance the
objective will be met.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
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.
An investment in this unmanaged
unit investment trust should be made with an understanding of
the risks involved with owning ETFs and fixed income securities.
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.
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 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.
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 security market or investors’ perception thereof, possible
downgrades and defaults of interest and/or principal.
Certain of the ETFs included in the portfolio 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 rates decline.
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.
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.
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’
Certain of the ETFs invest in securities issued by foreign issuers
which are subject to certain risks including currency and interest
rate 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 liquid, less regulated and more
volatile than the U.S. and developed foreign markets.
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 organizational costs.
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.
Although this portfolio 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.
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.
For a discussion of additional risks of investing in the trust see
the “Risk Factors” section of the prospectus.