Limited Duration Fixed Income ETF Portfolio, Series 40
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 that the objectives will be achieved.
Why Limited Duration?
- Limited duration ETFs provide investors with the potential for 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.
- Limited duration ETFs 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.
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 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 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 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.
Certain of the floating-rate securities pay interest based on LIBOR. The United Kingdom’s Financial Conduct
Authority, which regulates LIBOR, will cease making LIBOR available as a reference rate over a phase-out
period that will begin immediately after December 31, 2021. The unavailability or replacement of LIBOR may
affect the value, liquidity or return on certain portfolio investments. Any potential effects of the transition
away from LIBOR can be difficult to ascertain, and they may vary depending on a variety of factors and they
could result in losses to the portfolio.
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 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.
A significant percentage 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 the trust.
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 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 covenant-lite loans which contain fewer or
no maintenance covenants and may hinder the ETF’s ability to reprice
credit risk and mitigate potential loss especially during a downturn in
the credit cycle.
Certain of the ETFs 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.
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.
About one year after the United Kingdom officially departed the European Union (commonly referred to as “Brexit”), the United Kingdom and the European Union reached a trade agreement that became effective onDecember 31, 2020. It is not currently possible to determine the extent of the impact the Brexit trade agreement may have on the portfolio’s investments and this certainly could negatively impact current and future economicconditions in the United Kingdom and other countries, which could negatively impact the value of the portfolio’s investments.
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.
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.
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 resulted in major disruptions to economies and markets around the
world. Financial markets have experienced extreme volatility and severe losses, negatively impacting global
economic growth prospects. The duration of the COVID-19 outbreak and its effects cannot be determined
with certainty and may exacerbate other political, social and economic risks.
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.
For a discussion of additional risks of investing in the trust see the “Risk
Factors” section of the prospectus.