Senior Loan Select Closed-End, Series 38
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.
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. In addition, we believe senior loans currently offer a compelling value given
that the default rate in the senior loan market is well below its long-term average, the U.S. is
experiencing slow but positive economic growth, and there continues to be strong investor
demand for the asset class.
What Are Senior Loans?
Senior loans are floating-rate
secured debt extended to
corporations which are backed by
collateral, such as property, and are
senior in the capital structure of a
company. The capital structure is how a
company finances its overall operations
and growth by using different sources of
funds such as long-term debt, short-term debt, common equity and preferred equity.
Investors may find comfort in the fact that senior loans have a senior secured position in the
capital structure, thereby having a claim not only on the cash flow of a given company, but also its
assets. This added security has historically offered investors less volatility in relation to the junior
parts of a given capital structure.
Why Senior Loans?
- 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 interest rates.
- We believe that senior loans can be used as an effective means to aid portfolio diversification
because of their low correlation to other fixed-income asset classes. Correlation is a statistical
measure that provides a way to evaluate the potential diversification benefits of combining
different assets. The historical correlation between senior loans and other asset classes, including
investment-grade corporate bonds and equities, is low. Because senior loans are not highly
correlated with other 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.
This unit investment trust seeks high current
income by investing in a diversified portfolio of
closed-end funds which invest in senior loan
floating-rate securities; 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 owning closed-end funds that
invest in senior loan floating-rate securities.
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. All of
the closed-end funds employ the use of leverage, which
increases the volatility of such funds.
All of the closed-end funds 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. Due to the
uncertainty regarding the future utilization of LIBOR and the
nature of any replacement rate, the potential effect of a
transition away from LIBOR on a fund or the financial
instruments in which the fund invests cannot yet be determined.
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 degree.
All 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.
Municipal bonds are subject to numerous risks, including higher
interest rates, economic recession, deterioration of the
municipal bond market, possible downgrades and defaults of
interest and/or principal.
All of the closed-end funds invest in covenant-lite loans which
contain fewer or no maintenance covenants and may hinder the
closed-end fund’s ability to reprice credit risk and mitigate
potential loss especially during a downturn in the credit cycle.
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.
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.
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.
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
For a discussion of additional risks of investing in the trust see
the "Risk Factors" section of the prospectus.