Key 3 Portfolio, Series 23
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 4/28/2023, they represent approximately 48.5% of the S&P 500 Index based on market
capitalization. The S&P 500 Index is an unmanaged index of 500 companies widely used to
measure large-cap U.S. stock market performance.
The 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 has
been introduced to what has traditionally been viewed as a more value-oriented sector.
The gap between traditional media and digital media consumption continues to widen as people
devote less time to analog formats (television, radio, or print) and more time to digital formats
(mobile, computers, and other connected devices). It is estimated that, in 2023, adults in the U.S.
will spend an average of eight hours and 20 minutes per day on digital media, an increase of one
hour and 31 minutes from 2019.1
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 2021-2030, it is projected that health care spending will grow at an average rate
of 5.1% 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 nearly $4.6 trillion in 2023, an increase of 5.5% from
2022. In addition, global end-user spending on public cloud services is anticipated to reach
approximately $597.3 billion in 2023, growing 21.7% and up from $491 billion in 2022.
Portfolio Selection Process
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.
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.
In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain investments as well as performance.
The ongoing effects of the COVID-19 global pandemic, or the potential impacts of any future public health crisis, may cause significant volatility and uncertainty in global financial markets. While vaccines have been developed,
there is no guarantee that vaccines will be effective against future 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.