Senior Loan and Limited Duration ETF Portfolio, Series 3
Interest rates remain low from a historical perspective, but the current environment has made it challenging to invest for income. 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 and limited duration bonds.
Consider These Factors
- While senior loans are generally loans which have been made to companies whose debt is
typically rated below investment grade, they are senior in the asset structure of a company
and historical recovery rates in the event of a default tend to be much higher relative to junior
high-yield corporate debt.
- 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.
- Limited duration exchange-traded funds (ETFs) provide investors with the potential for high
income but with less interest rate sensitivity. The duration of a bond is a measure of its price
sensitivity to interest rate movements based on the weighted average term to maturity of its
interest and principal cash flows.
- Limited duration ETFs are typically diversified across several different segments of the fixed-income market. This multi-sector income approach primarily helps to reduce volatility and
also has the potential to enhance your returns because different sectors within the debt
market often react differently to economic and market changes.
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 high current income by investing in a portfolio of ETFs which
invest in senior loan and limited duration fixed-income 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 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 associated with senior loan and limited duration ETFs.
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.
A significant percentage 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.
A significant percentage 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 exchange-traded funds’ ability to reprice credit risk and mitigate potential loss especially during
a downturn in the credit cycle.
Certain of the ETFs 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. The United Kingdom’s Financial Conduct
Authority (“FCA”), which regulates LIBOR, intends to cease making LIBOR available as a reference rate over
a phase-out period that began in early 2022. However, subsequent announcements by the FCA, the LIBOR
administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may
continue until mid-2023. 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.
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.
Certain 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 security market or
investors’ perception thereof, possible downgrades and defaults of interest and/or principal.
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.
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.
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
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.