Senior Loan Closed-End and ETF Portfolio, Series 23
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 fixedrate 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.
This unit investment trust seeks current monthly income and capital appreciation by
investing in a fixed portfolio of closed-end funds (CEFs) and exchange-traded funds (ETFs)
that invest in senior loans; however, there is no assurance the objectives will be met.
Under normal circumstances, the trust will invest at least 80% of its assets in closed-end
funds and ETFs that invest in senior loans.
What Are Senior Loans?
Senior loans are floating-rate
secured debt extended to noninvestment
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
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.
|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 CEFs and ETFs that invest in senior loan floating-rate
CEFs and 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, CEFs 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 and CEFs frequently trade at a discount from
their net asset value in the secondary market. Certain of the funds
in which the portfolio invests may employ the use of leverage,
which increases the volatility of such funds.
Certain of the funds invest in common stocks. 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
The yield on CEFs and 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 ("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
sec urities. 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 affec ted by short-term credit developments to
a greater degree.
Certain of the funds 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.
All of the 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.
Certain of the funds invest in money market or similar
securities as a defensive measure when the fund’s investment
advisor anticipates unusual market or other conditions. If
market conditions improve while a fund has invested in these
securities, the potential gain from the market upswing may be
reduced, limiting the fund’s opportunity to achieve its
All of the funds 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.
All of the 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.
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.
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.;
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
The value of the securities held by the trust may be subject to
steep declines or increased volatility due to changes in
per formance or perception of the issuers.