Inflation Hedge Portfolio, Series 40
When it comes to investing — whether for income or for growth — you can't afford to ignore the
eroding effect inflation can have on the value of your assets. In today's economic environment,
inflation has largely been held in check, which is why it might be easy to overlook inflation when
building your investment portfolio. However, there is growing concern that government spending
could spark inflation.
This unit investment trust seeks above-average
total return; however, there is no assurance the
objective will be met.
Investing to Counteract Inflation
Like stock returns, economic growth, and interest rates, inflation is one of those variables you can't control. But, as an investor, you can control how your investment dollars are allocated. For many investors, investing in natural resources, precious metals, real estate investment trusts (REITs) and bonds that typically react favorably to inflation are ways to hedge against inflation in a properly diversified portfolio.
The Inflation Hedge Portfolio is a professionally-selected unit investment trust which invests in exchange-traded funds (ETFs) which are designed to track gold, silver, REITs, senior loans or government bonds and in common stocks of agriculture companies, energy companies and materials companies (including metals and mining companies). Many factors will affect the value of the securities in the trust and there can be no assurance that the trust will achieve a positive return during an inflationary period.
Gold and Precious Metals
Gold and other precious metals have historically held their value during times of rising inflation.
Investing in the commodities themselves is not the only way to hedge against rising inflation.
Mining companies also tend to benefit as their earnings should improve if the price of gold and
other precious metals rises. Such hedging may also be accomplished by investment in ETFs which
themselves invest in commodities such as gold and silver.
When economic activity accelerates, whether in the U.S. or abroad, the global demand for natural
resources grows. The resulting increase in the underlying commodity prices historically generates
higher profits for companies in the energy sector and translates into higher returns for investors.
Real estate has traditionally been a good hedge against higher inflation. Historically, REITs have
performed well in times when the economy improves and inflation and interest rates trend higher.
In addition, an improving economy tends to lead to better occupancy rates in commercial
buildings and malls which often results in dividend increases among REITs.
The negative effects of inflation on bonds may be offset through ETFs which invest in inflationlinked
bonds. Inflation-linked government bonds, commonly known in the U.S. as Treasury
Inflation-Protected Securities (TIPS), are securities issued by governments that seek to provide
inflation protection to investors. The coupon payments and principal value on these securities are
adjusted according to inflation over the life of the bonds.
Senior loans are floating-rate secured debt extended to non-investment grade corporations which are
backed by collateral, such as property, and are senior in the capital structure of a company. The capital
structure is how a company finances its overall operations and growth by using different sources of
funds such as long-term debt, short-term debt, common equity and preferred equity. Investors may find
comfort in the fact that senior loans have a senior secured position in the capital structure, thereby
having a claim not only on the cash flow of a given company, but also its assets. This added security has
historically offered investors less volatility in relation to the junior parts of a given capital structure.
According to the USDA, global demand and trade for agricultural products are anticipated to continue rising
through 2027/28. Income growth is expected to remain strong, especially in many emerging and developing
economies, giving strong incentive for sustained growth in demand and trade for agricultural products.
Basic materials companies operate in a wide array of commodity-related businesses. Some examples
include chemicals, construction materials, glass, paper, forest and related packaging products, metals,
minerals and mining companies. This sector is cyclical in nature, which is to say that the demand for raw
materials and related products is largely driven by economic activity, particularly in the manufacturing
sector. When economic activity accelerates, the demand for raw materials often rises – as do prices.
|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 an investment in a portfolio of common
stocks and exchange-traded funds.
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 stock market.
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 may trade at a discount from
their net asset value in the secondary market. Certain ETFs may employ the use of leverage which increases the volatility of such funds.
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 REITs. Companies involved in the
real estate industry are subject to changes in the real estate
market, vacancy rates and competition, volatile interest rates
and economic recession.
A portfolio which is invested in securities of foreign issuers is subject to additional risks,
including currency fluctuations, political risks, 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 developed, less liquid, less regulated, and more
volatile than the U.S. and developed foreign markets.
The portfolio is concentrated in stocks in both the energy and materials sectors making it subject
to additional risks, including limited diversification. The companies engaged in the energy sector
are subject to certain risks, including price and supply fluctuations caused by international
politics, energy conservation, taxes, price controls, and other regulatory policies of various
governments. Falling oil and gas prices may negatively impact the profitability and business
prospects of certain energy companies. The companies engaged in the materials sector,
including companies within the precious metals industry, are subject to price and supply
fluctuations, excess capacity, economic recession, domestic and international politics,
government regulations, volatile interest rates, consumer spending trends and overall capital
The portfolio also invests in precious metals companies. Companies in the precious metals
industry are subject to risks associated with the exploration, development, and production of
precious metals including competition for land, difficulties in obtaining required governmental
approval to mine land, inability to raise capital, increases in production costs and political
unrest. In addition, the price of gold and other precious metals is subject to wide fluctuations.
The portfolio also invests in agribusiness companies. Agribusiness companies are subject to
cyclicality of revenues and earnings, economic recession, currency fluctuations, changing
consumer tastes, extensive competition, excess capacity, product liability litigation and
governmental regulation and subsidies.
Certain of the ETFs invest in commodities. Commodity prices are subject to several factors
including, price and supply fluctuations, excess capacity, economic recession, domestic and
international politics, government regulations, volatile interest rates, consumer spending trends
and overall capital spending levels.
Certain of the ETFs invest in Treasury Inflation-Protected Securities (TIPS). TIPS are subject to
numerous risks including changes in interest rates, economic recession and deterioration of the
bond market or investors' perception thereof.
An investment in a portfolio containing small-cap and mid-cap companies is subject to
additional risks, as the share prices of small-cap companies and certain mid-cap companies are
often more volatile than those of larger companies due to several factors, including limited
trading volumes, products, financial resources, management inexperience and less publicly
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.
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.
This UIT is a buy and hold strategy and investors should consider their ability to hold the trust
until maturity. There may be tax consequences unless units are purchased in an IRA or other
qualified plan. This unit investment trust is not an absolute return investment vehicle.
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.
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.
For a discussion of additional risks of investing in the trust see the "Risk Factors" section of