Interest Rate Hedge and ETF Portfolio, Series 25
Like stock returns, economic
growth, inflation and interest rates are some variables that you can't control. But, as an investor,
you can control how your investment dollars are allocated.
The Interest Rate Hedge and ETF Portfolio is a professionally selected unit investment trust which
invests in common stocks of companies that have a history of dividend growth, as well as
exchange-traded funds (ETFs) which invest in convertible securities, Treasury Inflation Protected
Securities (TIPS), master limited partnerships (MLPs), limited duration bonds and real estate
investment trusts (REITs).
This unit investment trust seeks above-average total return; however, there is no assurance the objective will be met.
Investing for Rising Interest Rates
- According to Ibbotson Associates, dividends have provided approximately 42% of the 9.99% average
annual total return on the S&P 500 Index from 1926 through 2018. The S&P 500 Index is an
unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The index
cannot be purchased directly by investors. For the Interest Rate Hedge and ETF Portfolio, we seek to
include high quality dividend paying companies with the capacity to increase their dividends over time.
- Convertible securities are bonds, preferred stocks, or other securities issued by a corporation which are convertible into common stock at a specified ratio. Because of this, convertible securities have some characteristics of both common stocks and bonds. Like stocks, convertible securities offer capital appreciation potential. Additionally, the hybrid nature of convertible securities makes them tend to be less sensitive to interest rate changes than bonds of comparable quality and maturity.
- MLPs are limited partnerships that are publicly traded on a U.S. securities exchange, which combine the tradeability of common stocks with the corporate structure of a limited partnership. MLPs are traditionally high cash flow businesses that pay out a majority of that cash to investors. Investing in MLPs through ETFs provides an efficient alternative to investing directly in MLPs. Unlike individual partnership investments, an ETF provides one Form 1099 per shareholder at the end of the year, rather than multiple K-1s and potential state filings.
- TIPS are bonds issued by the U.S. government that are designed to provide inflation protection to investors. With TIPS, the coupon payments and principal value are adjusted according to inflation over the life of the bonds.
- Real estate has traditionally been a good hedge against higher inflation. An improving economy tends to lead to better occupancy rates in commercial buildings and malls which often results in dividend increases among REITs.
- Limited duration bonds provide investors with high income but with less interest rate sensitivity than longer duration bonds. 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. Historically, ETFs that invest in limited duration bonds have tended to hold up better in rising interest rate environments than ETFs which invest in longer duration bonds.
Past performance is no guarantee of future results.
|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.
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
ETFs may employ the use of leverage, which increases the volatility of such funds.
An investment in a portfolio containing 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
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.
Certain of the ETFs invest in MLPs. Investments
in MLPs are subject to the risks generally applicable to companies in the energy and natural
resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and
exploration risk. U.S. taxing authorities could challenge the trust’s treatment of the MLPs for
federal income tax purposes. These tax risks could have a negative impact on the after-tax income
available for distribution by the MLPs and/or the value of the trust’s investments.
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
This unit investment trust is not an absolute return investment vehicle.
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.
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 high-yield securities.
Investing in high-yield securities (“junk” bonds) should be viewed as speculative and you
should review your ability to assume the risks associated with investments that utilize such
bonds. 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
bonds and are affected by short-term credit developments to a greater degree.
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 available information.
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 investment grade securities. Investment grade securities are
subject to numerous risks including higher interest rates, economic recession, deterioration of
the investment grade bond market or investors’ perception thereof, possible downgrades and
defaults of interest and/or principal.
Certain of the ETFs invest in convertible securities. Convertible securities are bonds, preferred
stocks and other securities that pay a fixed rate of interest (or dividends) and will repay principal
at a fixed date in the future. However, these securities may be converted into a specific number of
common stocks at a specified time. As such, an investment in convertible securities entails some
of the risks associated with both common stocks and bonds.
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.
Certain of the ETFs invest in TIPS which are subject to numerous risks including changes in interest
rates, economic recession and deterioration of the bond market or investors’ perception thereof.
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 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.
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
For a discussion of additional risks of investing in the Trust see the “Risk Factors” section of