Senior Loan Closed-End and ETF Portfolio, Series 36
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 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 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 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 employ the use of leverage, which increases the volatility
of such funds.
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. 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 funds invest in covenant-lite loans which contain fewer or no maintenance covenants and may
hinder the funds’ ability to reprice credit risk and mitigate potential loss especially during a downturn in the
Certain 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. All of the floating-rate securities
pay interest based on LIBOR. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, will cease making LIBOR available as a reference rate over a phase-out period that will begin immediately after
December 31, 2021. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain portfolio investments. Any potential effects of the transition away from LIBOR can be difficult to ascertain, and
they may vary depending on a variety of factors and they could result in losses to the portfolio.
All of the funds 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 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.
About 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
The COVID-19 global pandemic has caused significant volatility and declines in global financial markets, causing losses for investors. The development of vaccines has slowed the spread of the virus and allowed for the
resumption of “reasonably” normal business activity in the United States, although 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.
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.
For a discussion of additional risks of investing in the trust see
the “Risk Factors” section of the prospectus.