Income Allocation Closed-End Portfolio, 3rd Quarter 2020 Series
The Multi-Sector Approach
The Income Allocation Closed-End 3Q '20 (The Income Allocation Closed-End Portfolio) is a unit
investment trust designed to enable investors who are seeking a high rate of current monthly income to
reduce some of the volatility typically associated with high-income investments. To accomplish this, the
portfolio is diversified across a broad range of 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 securities has the potential to reduce the overall risk of the portfolio.
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 redemptions.
The portfolio offers investors diversification by investing in a broad range of
closed-end funds that are further diversified across hundreds of individual issues. 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 fixed-income investment products because they are not
subjected to cash inflows and outflows, which can dilute dividends over time. However, as a result of
bond calls, redemptions and advanced refundings, which can dilute a fund’s income, the portfolio cannot
guarantee consistent income.
This unit investment trust seeks high current monthly income, with capital
appreciation as a secondary objective. There is, however, no assurance that the
objectives will be achieved.
| 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 associated with an investment in a portfolio of closed-end funds.
Closed-end 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. Unlike
open-end funds, which trade at prices based on a current determination
of the fund’s net asset value, closed-end funds frequently trade at a
discount to their net asset value in the secondary market.
Certain of the closed-end funds invest in common stocks. Common
stocks are subject to 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 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 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 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 investment grade
securities. Investment grade bonds are subject to numerous risks
including higher interest rates, economic recession,
deterioration of the investment grade security market or
investors’ perception thereof, possible downgrades and defaults
of interest and/or principal.
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.
All 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
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.
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
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
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
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. The markets for credit instruments, including municipal securities, have experienced periods of extreme illiquidity and volatility.
For a discussion of additional risks of investing
in the trust see the “Risk Factors” section of the