Diversified High Income Closed-End Portfolio, Series 42
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 objective, risks, and
charges and expenses carefully before investing. Contact your financial professional
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. Closedend
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 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 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 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 funds’ 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.
On January 31, 2020, the United Kingdom officially departed the European Union (commonly referred to as
“Brexit”). Brexit has led to volatility in global financial markets, in particular those of the United Kingdom
and across Europe, and may also lead to weakening in political, regulatory, consumer, corporate and financial
confidence in the United Kingdom and Europe.
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 cybersecurity.
The recent outbreak of a respiratory disease designated as COVID-19 was first detected in China in December
2019. The global economic impact of the COVID-19 outbreak is impossible to predict but is expected to
disrupt manufacturing, supply chains and sales in affected areas and negatively impact global economic
growth prospects. The COVID-19 outbreak has also caused significant volatility and declines in global
financial markets, which have caused losses for investors. The impact of the COVID-19 outbreak may be short
term or may last for an extended period of time, and in either case could result in a substantial economic
downturn or recession.
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.
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
For a discussion of additional risks of investing in the trust see the “Risk Factors” section of