High Income Model Portfolio, Series 2
The High Income Model Portfolio is designed to complement core fixed income and/or dividend paying
equity portfolios by targeting a high level of income and a competitive total return. The portfolio 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 Investment Committee through a dynamic approach.
The investment philosophy for the High Income Model Portfolio is based on the belief that a well informed
macroeconomic framework, rigorous credit analysis and disciplined portfolio construction can
lead to alpha generation within a portfolio. Our selection process evaluates relative strength, our
investment outlook and relative valuation among asset classes to determine an asset allocation that
seeks to capture market trends and near term opportunities.
Our core framework is designed around seeking yield with a secondary focus on total return. This
investment philosophy is expressed through an investment process that combines a balance of rigorous
bottom-up fundamental credit analysis and disciplined portfolio construction. Risk management is a
critical component of the entire process and is embedded in both the fundamental credit analysis and
portfolio construction. Key components of the investment process include:
- Relative value assessment
- Portfolio diversification
Fundamental Credit Analysis
- Consistency of cash flow generation
- Management quality
- Collateral assessment
- Credit agreement/bond indenture document review
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.
TAXEFFICIENCY | The ETF structure allows for increased tax efficiency.
FULLYINVESTED | 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 monthly income by investing in a diversified portfolio
of First Trust® 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 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 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 may employ the use of
leverage, which increases the volatility of such funds.
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 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 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 shortterm
credit developments to a greater degree.
Certain of the ETFs invest in floating-rate securities. 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 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
Certain of the ETFs invest in securities of foreign issuers which
are subject to additional risks, including currency fluctuations,
political risks, withholding, the lack of adequate financial
information, and exchange control restrictions impacting
Certain of the ETFs 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
Certain of the ETFs invest in money market or similar securities
as a defensive measure when the fund’s investment advisor
anticipates unusual market or other conditions. If market
conditions improve while a fund has invested in these
securities, the potential gain from the market upswing may be
reduced, limiting the fund’s opportunity to achieve its
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
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.
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.
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.
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.