Key 3 Portfolio, Series 16
The Key 3 Portfolio invests in three sectors that are a few of the main principal drivers behind the
U.S. economy – communication services, health care, and information technology. In fact, as of
8/31/21, they represent 52.8% of the S&P 500 Index, accounting for over half of the total market
capitalization of the index. The S&P 500 Index is an unmanaged index of 500 stocks widely used
to measure large-cap U.S. stock market performance.
In October 2018, the Telecommunication Services sector was renamed Communication Services to
include media and entertainment companies. This convergence of technology and entertainment
has brought about a more modern, updated approach to the everchanging technology landscape
and acknowledges changing consumer habits and companies influencing the changes. With the
changes, a new growth element is being introduced to what has traditionally been viewed as a
more value-oriented sector.
With the spread of COVID-19, digital media consumption has increased as people stay at home.
Consumption is expected to continue to increase across social media, over-the-top video and
The health care industry has been responsible for several discoveries that have led to new
drugs and products designed to better serve the masses, especially the aging population.
These discoveries have improved the quality of life and the life expectancy of millions. More
recent research, relating to areas such as genomics, is providing avenues of growth never before
imagined. Debilitating diseases, previously untreatable, are now often manageable or even
curable. From 2019-2028, it is projected that health care spending will grow at an average rate
of 5.4% annually.2
Currently, there are more than 8,000 medicines in development around the world. Of these, 74% have the potential to be first-in-class treatments, which represents an entirely new
approach to treating a disease.3
From cell phones to MRIs, innumerable products and services, as well as the people that use
them each day, rely in some way on technology. Powering this technology in our everyday lives
are computer, software, networking, semiconductor and communication companies. Gartner
forecasts worldwide IT spending to total approximately $4.2 trillion in 2021, an increase of 8.6%
from 2020. In addition, end-user spending on public cloud services is anticipated to reach $396
billion in 2021 and grow 21.7% to reach an estimated $482 billion in 2022.
Portfolio Selection Process
We believe that the communication services, health care and information technology sectors
are three key sectors that have the potential to lead the economic recovery once the COVID-19
pandemic is behind us.
We begin with the Russell 3000 Index to create an initial universe of stocks with a market-cap above
$10 billion that are in these three sectors. Next we examine the historical financial results of the
stocks from the initial universe. The stocks are then evaluated using fundamental factors such as
sales, earnings and cash flow growth; valuation factors such as price/earnings, price/cash flow,
price/sales and price/book; and technical factors such as price momentum and earnings surprises.
An estimated value is calculated for each of the companies utilizing a Cash Flow Return on
Investment (CFROI) method. A secondary valuation is also made employing a concept called
Economic Margin. The companies which currently trade at an attractive market price relative to
their estimated value are favored over companies that do not.
The final portfolio is then selected by a team of equity analysts who evaluate each stock by
examining the stock’s relative valuation and other qualitative factors such as competitive
advantages, new products and quality of management.
Our selection process attempts to find the stocks with the best prospects for above-average
capital appreciation by identifying those that meet our investment objectives, trade at attractive
valuations, and, in our opinion, are likely to exceed market expectations of future cash flows.
The final portfolio is comprised of 30 equally weighted Key 3 stocks - 10 stocks in communication
services, 10 stocks in health care and 10 stocks in information technology.
The portfolio's objective is to provide investors the potential for above-average
capital appreciation; however, there is no assurance the objective will be met.
The Russell 3000 Index is an unmanaged index used to measure the performance of the largest 3000 U.S. stocks based on total market capitalization. The index cannot be purchased directly by investors.
|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 common stocks, 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.
You should be aware that the portfolio is concentrated in stocks in the communication services, health care
and information technology sectors which involves additional risks, including limited diversification. The
companies engaged in the communication services sector are subject to rapidly changing technology, rapid product obsolescence, loss of patent protection, cyclical market patterns, governmental regulation, evolving industry
standards and frequent new product introductions. Certain companies may be particularly susceptible to cybersecurity threats, which could have an adverse effect on their business. The companies engaged in the health care
sector are subject to fierce competition, high research and development costs, governmental regulations, loss of patent protection, and changing consumer spending trends. In addition, health crises, such as a pandemic outbreak,
can severely impact the health care industry in particular. The companies engaged in the information technology sector are subject to fierce competition, high research and development costs, and their products and services
may be subject to rapid obsolescence. Technology company stocks, especially those which are Internet-related, may experience extreme price and volume fluctuations that are often unrelated to their operating performance.
One of the securities held by the trust is issued by a foreign entity. An investment in a portfolio containing equity 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.
An investment in a portfolio containing mid-cap companies is subject to additional risks, as the share prices of 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.
Large capitalization companies may grow at a slower rate than the overall market.
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 COVID-19 global pandemic has caused significant volatility and declines in global financial markets,
causing losses for investors. The development of vaccines has slowed the spread of the virus and allowed
for the resumption of “reasonably” normal business activity in the United States, although many countries
continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective
against emerging variants of the disease.
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 qualified plan.