Tactical Income Opportunity Portfolio, Series 5
Investors who are looking for income while still retaining growth potential
have limited alternatives when faced with the possibility of rising interest
rates. Bonds tend to lose value in a rising interest rate environment. Equities,
on the other hand, have often historically provided positive returns after the
Federal Reserve's initial rate hike. Like stock returns, economic growth, and
inflation, interest rates are one of those variables that you can't control.
But, as an investor, you can control how your investment dollars are allocated.
This unit investment trust seeks current income, with total return as a secondary objective; however, there is no assurance that the objectives will be achieved.
Investing for Rising Interest Rates
The Tactical Income Opportunity Portfolio is a
unit investment trust that invests
in a diversified portfolio of closedend
funds (CEFs), common stocks
and real estate investment trusts
(REITs). The portfolio is weighted
based on the adjacent allocation.
- The multi-strategy segment of the portfolio consists of CEFs which invest in types of securities which typically react favorably to rising interest rates.
- 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.
- 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.
- The dividend paying stocks and REITs are selected by applying a disciplined investment strategy which adheres to pre-determined screens and factors. These screens and factors are designed to identify companies that, in our opinion, have above-average dividend yields and trade at attractive valuations.
|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 an investment in a portfolio of common
stocks and closed-end funds.
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 stock market.
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. Certain
closed-end funds may employ the use of leverage which increases the volatility
of such funds.
Certain of the closed-end funds invest in senior loans. 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 ("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.
All of the closed-end 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 that utilize such
bonds. 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 bonds and are
affected by short-term credit developments to a greater degree.
Certain of the closed-end funds in the portfolio 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 closed-end funds invest in convertible securities. Convertible securities are bonds, preferred stocks and other securities that pay a fixed rate of interest (or dividends) and will repay principal at a fixed date in the future. However, these securities may be converted into a specific number shares of common stocks at a specified time. As such, an investment in convertible securities entails some of the risks associated with both common stocks and bonds.
Certain of the securities in the portfolio are issued by (REITs). Companies involved in the real estate industry
are subject to changes in the real estate market, vacancy rates,
competition, volatile interest rates and economic recession.
An investment in a portfolio containing small-cap and mid-cap companies is subject to additional
risks, as the share prices of small-cap companies and certain mid-cap companies are often more
volatile than those of larger companies due to several factors, including limited trading volumes,
products, financial resources, management inexperience and less publicly available information.
An investment in foreign securities should be made with an understanding of the additional risks involved with foreign issuers, such as 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. Risks associated with investing in foreign securities may be more pronounced in emerging markets where the securities markets are substantially smaller, less liquid, less regulated and more volatile than the U.S. and developed foreign markets.
Certain of the closed-end funds invest in options. Options are subject to various risks including
that their value may be adversely affected if the market for the option becomes less liquid or
smaller. In addition, options will be affected by changes in the value and dividend rates of the
stock subject to the option, an increase in interest rates, a change in the actual and perceived
volatility of the stock market and the common stock and the remaining time to expiration.
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.
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.
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.
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
For a discussion of additional risks of investing in the trust see the "Risk
Factors" section of the prospectus.