Diversified High Income Closed-End Portfolio, Series 37
The Multi-Sector Approach
The Diversified High Income Closed-End Portfolio seeks to provide investors with a high rate of current
monthly income by investing across a broad range of high income paying closed-end funds. Because
different sectors follow different cycles and react differently to changes in global economies and interest
rates, spreading assets across this spectrum of closed-end funds has the potential to reduce the overall risk
of the portfolio.
When selecting closed-end funds for this portfolio, we look at several factors
- Discount - We favor funds which are trading
at a discount to net asset value and we favor
those which are trading at a greater discount
relative to their peers.
- Consistent dividend - We favor funds which
have a history of paying a consistent
- Expense ratio - We favor funds which have a
lower than average expense ratio relative to
- Diversification - We limit exposure to
individual fund companies/managers.
- Liquidity - We favor larger funds and more
Unlike open-end mutual funds, closed-end funds maintain a relatively fixed pool
of investment capital. This allows portfolio managers to better 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
The portfolio offers investors diversification by investing in a broad range
of closed-end funds that are further diversified across hundreds of individual
securities. Diversification does not guarantee a profit or protect against loss.
Closed-end funds are structured to generally provide a more stable income stream
than other managed investment products because they are not subjected to cash
inflows and outflows, which can dilute dividends over time. However, stable
income cannot be assured.
This unit investment trust seeks a high rate of current monthly income, with capital
appreciation as a secondary objective by investing in a diversified pool of closed-end
funds. 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 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 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 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.
Certain of the closed-end funds invest in convertible securities.
Convertible securities are bonds, preferred stocks and other
securities that pay a fixed rate of interest (or dividends) and
will repay principal at a fixed date in the future. However,
these securities may be converted into a specific number of
common stocks at a specified time. As such, an investment in
convertible securities entails some of the risks associated with
both common stocks and bonds.
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 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 security market or
investors’ perception thereof, possible downgrades and
defaults of interest and/or principal.
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 the trust.
Certain of the closed-end funds 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 closed-end funds invest in 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 preferred securities.
Preferred securities are sensitive to changes in interest rates
and the market price generally falls with rising interest rates.
Preferred securities are more likely to be called for redemption
in a declining interest rate environment. Preferred securities
are typically subordinated to bonds and other debt
instruments in a company’s capital structure, in terms of
priority to corporate income, and therefore will be subject to
greater credit risk than those debt instruments.
Certain of the closed-end funds invest in real estate investment trusts (REITs). Companies
involved in the real estate industry are subject to changes in the real estate market, vacancy
rates and competition, volatile interest rates and economic recession.
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 covenant-lite loans which contain fewer or no
maintenance covenants and may hinder the closed-end fund’s ability to reprice credit risk and
mitigate potential loss especially during a downturn in the credit cycle.
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 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.
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
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.
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.
For a discussion of additional risks of investing in the trust see the “Risk Factors” section of
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.