Senior Loan & Limited Duration Closed-End, Series 86
As interest rates remain low, these are challenging times to invest for income. In this environment, many investors are seeking alternative sources of income, including those which have historically
reacted favorably during periods of rising interest rates, such as senior loans and limited duration bonds.
This unit investment trust seeks high current income by investing in a diversified portfolio of closed-end funds which invest in senior loan and limited duration fixed-income securities; however, there is no assurance the objective will be met.
Consider These Factors
- While senior loans are generally loans which have been made to companies
whose debt is typically rated below investment grade, they are senior in the
asset structure of a company and historical recovery rates in the event of
a default tend to be much higher relative to junior high-yield corporate debt.
- The interest paid on a senior loan resets every 30-90 days based on prevailing
short-term interest rates.Therefore, should short-term rates move higher, investors
in senior loans would receive a higher income stream due to the floating-rate
nature of the interest on the loans.Unlike securities with a fixed rate coupon,
a senior loan's floating-rate feature provides a natural hedge against rising
- We believe there is potential for interest rates to move higher, which makes
limited duration closed-end funds attractive because they provide investors
with high income but with less interest rate sensitivity. 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 these funds have tended to hold up better in rising interest
rate environments than closed-end funds which invest in longer duration bonds.
- Limited duration closed-end funds are typically diversified across several
different segments of the fixed income market.This multi-sector income approach
primarily helps to reduce volatility and also has the potential to enhance
your returns because different sectors within the debt market often react
differently to economic and market changes.
Since closed-end funds maintain a relatively fixed pool of investment capital,
portfolio managers are better able to adhere to their investment philosophies
through greater flexibility and control. In addition, closed-end funds do not
have to manage fund liquidity to meet potentially large redemptions.
Closed-end funds are structured to generally provide a more stable income stream
than other managed investment products because they are not subjected to cash
inflows and outflows, which can dilute dividends over time. However, as a result
of bond calls, redemptions and advanced refundings, which can dilute a fund's
income, the portfolio cannot guarantee consistent income.
| 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 associated with senior loan and limited duration
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
The yield on closed-end funds 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 ("high-yield"
securities or "junk" bonds). Investing in such 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 high-yield securities 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
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 included in the portfolio 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 closed-end funds in the portfolio 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.
All of the closed-end funds invest in securities
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.
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.
For a discussion of additional risks of investing in the trust see the "Risk Factors" section of the prospectus.
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.
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.
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.