Limited Duration Fixed Income ETF Portfolio, Series 27
The Limited Duration Fixed-Income ETF Portfolio is a unit investment trust which invests in a broad range of exchange-traded funds (ETFs). The ETFs invest in U.S. and foreign fixed-income securities
which have limited durations.
This unit investment trust seeks current
monthly income and capital appreciation;
however, there is no assurance the objectives
will be achieved. 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.
Why Limited Duration?
We believe that there is potential for interest rates to move higher which makes limited duration fixed-income ETFs attractive because they provide investors with the potential for high current income but with less interest rate sensitivity than longer duration securities. 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 those which invest in longer duration bonds. In addition, periods of rising rates often coincide with improving economic data which has been favorable historically for limited duration securities such as high-yield bonds and convertible securities which are more sensitive to economic growth than to interest rates.
Furthermore, securities with floating rates such as senior loans typically generate a higher level of income as short-term interest rates rise, providing a potential offset to traditional fixed-rate bond holdings which typically come under pressure in periods of rising rates.
What is an ETF?
ETFs offer investors the opportunity to buy and sell an entire basket of securities with a single transaction throughout the trading day. ETFs combine the characteristics of a mutual fund with the convenience and trading flexibility of stocks. Below is a list of other ETF features.
Diversification – ETFs hold a basket of securities which helps to mitigate single security risk. It is important to note that diversification does not guarantee a profit or protect against loss.
- Transparency – ETF holdings are available daily so investors know what they own.
- Tax Efficiency – The ETF structure allows for increased tax efficiency.
- Fully Invested – Unlike a traditional mutual fund, ETFs do not need to hold cash in order to satisfy investor redemptions which allows them to better adhere to their investment objective.
| 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 owning ETFs and fixed income securities.
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 in which the portfolio invests
may employ the use of leverage which increases the volatility of such funds.
All 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 market or investors’ perception thereof,
possible downgrades and defaults of interest and/or principal.
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
Certain of the ETFs invest in preferred stocks. Preferred stocks are equity securities of the issuing company which pay income in the form of dividends.
Preferred stocks are typically subordinated to bonds and other debt instruments in a company's capital structure, and therefore will be subject to greater
credit risk than those debt instruments.
Certain of the ETFs invest in senior loans. The yield on ETFs
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 (“junk” bonds). An investment in senior loans
involves the risk that the borrowers may default on their
obligations to pay principal or interest when due.
Certain of the ETFs invest in high-yield securities or “junk” bonds.
Investing in high yield 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 junk
bond 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 degree.
Certain of the ETFs invest in securities issued by foreign issuers
which are subject to certain risks including currency and
interest rate fluctuations, political risks, withholding, the lack of
adequate financial information, and exchange control
restrictions impacting foreign issuers. Risks associated with
investing in foreign securities may be more pronounced in
emerging markets where the securities markets are
substantially smaller, less liquid, less regulated and more
volatile than the U.S. and developed foreign markets.
Certain of the ETFs invest in mortgage-backed securities. Rising interest
rates tend to extend the duration of mortgage-backed securities, making them
more sensitive to changes in interest rates, and may reduce the market value of
the securities. In addition, mortgage-backed securities are subject to
prepayment risk, the risk that borrowers may pay off their mortgages sooner than
expected, particularly when interest rates decline.
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.
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.
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 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.