Senior Loan Closed-End and ETF Portfolio, Series 28
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 tend to be less rate sensitive
than other segments of the bond market, such as senior loans.
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 non-investment grade
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
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 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.
|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 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 securities.
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 employ the
use of leverage, which increases the volatility of such funds.
The closed-end funds invest significantly in “covenant-lite”
loans, which are loans made with minimal protections for the
lender. Because covenant-lite loans are less restrictive on
borrowers and provide less protection for lenders than typical
corporate loans, the risk of default may be significantly higher.
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 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. Highyield
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 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 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 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 floatingrate
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
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.
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
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.