FT High Income Model Portfolio, 3rd 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 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. 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.
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.
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.
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.
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.
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.