FT High Income Model Portfolio, 4th Qtr 2022
The FT High Income Model Portfolio primarily consists of exchange-traded funds (ETFs) advised
by First Trust Advisors L.P., an affiliate of the trust’s sponsor, and seeks income and total return
from non-traditional income sources. Along with the potential for higher yields, non-traditional
sources of income offer potential diversification benefits through lower correlations to traditional
fixed income sources. The ETFs included in the portfolio have been selected by the First Trust
Advisors Model Investment Committee through a dynamic approach.
Asset classes in the FT High Income Model Portfolio include, but are not limited to, high yield
corporate bonds, floating rate senior loans, mortgage-backed, preferred and convertible
The asset allocation process includes the following components:
Interest Rate Outlook/Duration - The prices of fixed income securities are greatly influenced by
changes in interest rates, with longer duration fixed income assets historically being the most impacted.
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. In general, duration represents
the expected percentage change in the value of a security for an immediate 1% change in interest rates.
For example, the price of a security with a three-year duration would be expected to drop by
approximately 3% in response to a 1% increase in interest rates. Consequently, we believe the expected
trajectory of interest rates is important for selecting fixed income asset classes. During periods of falling
interest rates, securities with longer terms tend to perform better than securities with shorter terms, and
vice-versa during rising interest rate periods.
Asset Type Valuation - We evaluate the relative value offered by different fixed income
assets by comparing historical absolute yields and option adjusted spreads for treasuries and
other asset types including hybrid or preferred securities against present market conditions.
Asset Type Fundamentals - Fundamental trends specifically relevant to each fixed income asset
class are closely monitored and evaluated.
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 to provide current monthly income, with capital appreciation as a
secondary objective; however, there is no assurance the objectives 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 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 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 of the ETFs 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
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. The United Kingdom’s Financial Conduct
Authority (“FCA”), which regulates LIBOR, intends to cease making LIBOR available as a reference rate over
a phase-out period that began in early 2022. However, subsequent announcements by the FCA, the LIBOR
administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may
continue until mid-2023. The unavailability or replacement of LIBOR may affect the value, liquidity or return
on certain portfolio investments. Any potential effects of the transition away from LIBOR can be difficult to
ascertain, and they may vary depending on a variety of factors and they could result in losses to the portfolio.
All 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 market or
investors’ perception thereof, possible downgrades and defaults of interest and/or principal.
Certain of the ETFs 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 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.
Securities of non-U.S. issuers are subject to additional risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting non-U.S. issuers.
Approximately one year after the United Kingdom officially departed the European Union (commonly
referred to as “Brexit”), the United Kingdom and the European Union reached a trade agreement that became
effective on December 31, 2020. It is not currently possible to determine the extent of the impact the Brexit
trade agreement may have on the portfolio’s investments and this certainly could negatively impact current
and future economic conditions in the United Kingdom and other countries, which could negatively impact
the value of the portfolio’s investments.
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.
In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain investments as well as performance.
The COVID-19 global pandemic has caused and may continue to cause significant volatility and declines in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease.
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.
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 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.
For a discussion of additional risks of investing in the trust see
the “Risk Factors” section of the prospectus.