Interest Rate Hedge Opportunity Portfolio, Series 3
We believe there is the potential for rising interest rates in the coming years. Although past
performance is not a guarantee of future results, bonds tend to lose value in a rising interest rate
environment while equities, on the other hand, have often historically provided positive returns after
the Federal Reserve's initial rate hike. Like stock returns, economic growth, and inflation, interest rates
are one of those variables that you can't control. As an investor, however, you can control how your
investment dollars are allocated.
The Interest Rate Hedge Opportunity 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 closed-end funds (CEFs) 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
- Dividends have historically been one of the few constants in the world of investing, contributing nearly half of the stock market's total returns. According to Ibbotson Associates, dividends have provided
approximately 42% of the 10.02% average annual total return on the S&P 500 Index, from 1926 through
2015. 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. Past performance is no
guarantee of future results.
- 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 closed-end funds provides an efficient alternative to investing
directly in MLPs. Unlike individual partnership investments, a closed-end fund
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.
- 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.
- 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, closed-end funds that invest in limited duration bonds have
tended to hold up better in rising interest rate environments than closed-end
funds which invest in longer duration bonds.
|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 closed-end 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.
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
closed-end funds may employ the use of leverage which increases the volatility
of such funds.
Certain of the closed-end funds 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.
Certain of the closed-end funds invest in investment grade
securities. Investment grade securities 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 TIPS. TIPS are subject to numerous
risks including changes in interest rates, economic recession and deterioration
of the bond market or investors' perception thereof.
Certain of the closed-end funds 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 closed-end funds 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 closed-end funds 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 rise during the life of the trust.
Certain of the securities are 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.
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 closed-end funds invest in high-yield securities or "junk" bonds. Investing in highyield
securities 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.
Certain of the closed-end funds 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.
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.
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.
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
For a discussion of additional risks of investing in the trust see the "Risk Factors" section of