FT High Income Model Portfolio, 2nd Qtr 2020
The FT High Income Model Portfolio seeks to provide high income with a secondary objective of
capital appreciation. The 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, emerging market debt, mortgage-backed, preferred and
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 Class Level Valuation - We evaluate the relative value offered by different fixed income assets.
To accomplish this, absolute yields and option-adjusted spreads to treasuries and other yield metrics are
compared with history and warranted levels given present conditions. In addition, consideration may be
given to hybrid asset classes.
Asset Class Level 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 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.
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 credit cycle.
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 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 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 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 foreign issuers.
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.
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.
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.
Local, regional or global events such as war, acts of terrorism, spread
of infectious diseases or other public health issues, recessions, or other
events could have a significant negative impact on the portfolio and
its investments. Such events may affect certain geographic regions,
countries, sectors and industries more significantly than others. 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,
negatively impact global economic growth prospects, and could result
in a substantial economic downturn or recession.
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.