FT Short Duration Fixed Income Model Portfolio, 4th Quarter 2022
Interest rates remain low from a historical perspective, but the current environment has made it
challenging to invest for income. Because of the inverse relationship between interest rates and
bond prices, fixed-income investors may be concerned about when or if interest rates rise and the
affect that might have on their returns. Generally, when interest rates rise, bond prices decline and
vice versa. Using duration as a tool to manage risk may help mitigate the impact that rising rates
may have on returns. This is because short duration securities tend to be less sensitive to changes
in interest rates than securities with higher durations. The FT Short Duration Fixed Income Model
Portfolio consists of exchange-traded funds (ETFs) the majority of which are advised by First Trust
Advisors L.P., an affiliate of the trust’s sponsor. The ETFs included in the portfolio have been selected
by the First Trust Advisors Model Investment Committee through a dynamic approach by targeting
a duration of no more than three years. The portfolio seeks to provide less interest rate sensitivity
when compared to traditional core fixed income benchmarks over time.
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.
This unit investment trust seeks to provide current monthly income, with capital appreciation as a
secondary objective; however, there is no assurance the objectives will be met.
|Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objective, 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 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.
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 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.
Securities of non-U.S. issuers are subject to additional risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting non-U.S. issuers.
Approximately 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 on December 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 economic conditions in the United Kingdom and other countries, which could negatively impact
the value of the portfolio’s investments.
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 COVID-19 global pandemic has caused and may continue to cause significant volatility and declines in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease.
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.
Although this portfolio terminates in approximately 15 months,
the strategy is long-term. Investors should consider their ability
to pursue investing in successive portfolios, if available. 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.