Precious Metals Select Portfolio, Series 42
The world of precious metals is a rapidly changing, dynamic market that can be affected by a multitude of domestic and geopolitical forces. Mining technology, supply and demand factors, and inflation
all combine to impact how the precious metals market will ultimately move. Furthermore, the various components of the precious metals market can all react differently to the numerous political and
economic events that unfold and develop with increasing regularity.
Why Precious Metals?
Despite the complexity and diversity of elements that can interact, many investment professionals
recommend including precious metals as part of a properly diversified portfolio in an attempt to provide
potential capital appreciation, liquidity, and as a hedge against conventional assets. The Precious Metals
Select Portfolio is a professionally-selected unit investment trust that invests in common stocks of metals
and mining companies and exchange-traded funds (ETFs) which are designed to track gold, silver and
other precious metals. For many investors, exposure to precious metals may offer one way to reduce the
overall risk in a properly diversified portfolio.
Diversification has long been recognized as a helpful way to mitigate volatility. Effective diversification
requires combining assets with low correlations—that is, those that have performed differently over
varying market conditions. We believe precious metals can be used as an effective means to aid portfolio
diversification because of their historically low correlation to investment-grade corporate bonds and
equities.1 Because precious metals are not highly correlated with traditional asset classes, they can
potentially decrease portfolio volatility, enhance overall return and provide meaningful diversification to
an asset allocation strategy. It is important to note that diversification does not guarantee a profit or
protect against loss.
1 Correlation measures the similarity of performance of two assets. Correlation is measured on a scale ranging between
-1 and +1. +1 means that the two investments have moved in perfect tandem with each other. Alternatively, -1 means
that when one security moves in one direction, the other security will move in the opposite direction.
A Potential Inflation Hedge
Federal deficit concerns, questions regarding global economic growth, and trade
tension between the U.S. and China, have contributed to an increase in the demand for
precious metals assets. Additionally, the Federal Reserve has signaled it will implement
more interest rate cuts in an attempt to offset growth concerns. This may encourage
investors to continue to shift assets into commodities such as gold and other precious
metals, which are historically known for holding value during times of rising inflation.
Investing in precious metals themselves is not the only way to hedge against rising
inflation. Mining companies also tend to benefit as their earnings could potentially
improve if the price of gold and other precious metals rises. Such hedging may also be
accomplished by investment in ETFs which themselves invest in commodities such as
gold and silver.
This unit investment trust seeks above-average
capital appreciation; however, there is no
assurance the objective will be met.
|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 an investment in a
portfolio of common stocks and ETFs.
Common stocks are subject to certain risks, 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.
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.
You should be aware that an investment that is concentrated in
stocks of precious metals companies in the materials sector
involves additional risks, including limited diversification.
Companies in the precious metals industry are subject to risks
associated with the exploration, development, and production
of precious metals including competition for land, difficulties in
obtaining required governmental approval to mine land,
inability to raise adequate capital, increases in production costs
and political unrest in nations where sources of precious metals
are located. In addition, the price of gold and other precious
metals is subject to wide fluctuations and may be influenced by
limited markets, fabricator demand, expected inflation, return
on assets, central bank demand and availability of substitutes.
Companies involved in metals and mining can be significantly
affected by events relating to international political and
economic developments, energy conservation, the success of
exploration projects, commodity prices, and tax and other
government regulations. Investments in these companies may
be speculative and may be subject to greater price volatility
than investments in other types of companies. Risks of
investing in these companies may include: changes in
international monetary policies or economic and political
conditions that can affect the supply of precious metals and
consequently the value of metals and mining company
investments; the U.S. or foreign governments may pass laws or
regulations limiting metals investments for strategic or other
policy reasons; and increased environmental or labor costs may
depress the value of metals and mining investments.
Commodity prices are subject to several factors including, price
and supply fluctuations, excess capacity, economic recession,
domestic and international politics, government regulations,
volatile interest rates, consumer spending trends and overall
capital spending levels.
An investment in a portfolio which includes foreign securities
should be made with an understanding of the additional risks
involved, such as currency fluctuations, political risk, 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.
Because the portfolio is concentrated in companies
headquartered, or with a significant presence, in Canada, the
portfolio may present more risks than a portfolio which is
broadly diversified over several regions.
An investment in a portfolio containing small-cap and
mid-cap companies is subject to additional risks, as the share
prices of small-cap companies and 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.
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.
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.
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
For a discussion of additional risks of investing in the trust see
the “Risk Factors” section of the prospectus.