Interest Rate Hedge Portfolio, Series 123
We believe there is the potential for rising interest rates in the coming years. Although past
performance is not a guarantee of future results, bonds tend to lose value in a rising interest rate
environment while 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. As an investor, however, you can control how your
investment dollars are allocated.
The Interest Rate Hedge Portfolio invests in common stocks of companies with a history of dividend
growth, as well as closed-end funds (CEFs) which invest in convertible securities, Treasury Inflation
Protected Securities (TIPS), master limited partnerships (MLPs), limited duration bonds and real estate
investment trusts (REITs).
This unit investment trust seeks above-average total return; however, there is no
assurance the objective will be met.
Investing for Rising Interest Rates
- Dividends have historically been one of the few constants in the world of investing, • contributing nearly
half of the stock market’s total returns. According to Ibbotson Associates, dividends have provided
approximately 42% of the 9.99% average annual total return on the S&P 500 Index, from 1926 through
2018. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock
market performance. The index cannot be purchased directly by investors. Past performance is no
guarantee of future results.
- Convertible securities are bonds, preferred stocks, or other securities issued by a corporation which are
convertible into common stock at a specified ratio. Because of this, convertible securities have some
characteristics of both common stocks and bonds. Like stocks, convertible securities offer capital
appreciation potential. Additionally, the hybrid nature of convertible securities makes them tend to be
less sensitive to interest rate changes than bonds of comparable quality and maturity.
- MLPs are limited partnerships that are publicly traded on a U.S. securities exchange, which combine the
tradeability of common stocks with the corporate structure of a limited partnership. MLPs are
traditionally high cash flow businesses that pay out a majority of that cash to investors. Investing in
MLPs through closed-end funds provides an efficient alternative to investing directly in MLPs. Unlike
individual partnership investments, a closed-end fund provides one Form 1099 per shareholder at the
end of the year, rather than multiple K-1s and potential state filings.
- TIPS are bonds issued by the U.S. government that are designed to provide inflation protection to
investors. With TIPS, the coupon payments and principal value are adjusted according to inflation over
the life of the bonds.
- Historically REITs have performed well in times when the economy improves and inflation and interest
rates trend higher. In addition, an improving economy tends to lead to better occupancy rates in
commercial buildings and malls which often results in dividend increases among REITs.
- Limited duration bonds provide investors with high income but with less interest rate sensitivity than
longer duration bonds. 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.
Historically, closed-end funds that invest in limited duration bonds have tended to hold up better in
rising interest rate environments than closed-end funds which invest in longer duration bonds.
|Not FDIC Insured Not Bank Guaranteed May Lose Value
You should carefully consider the portfolio investment objective, risks,
and charges and expenses 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 the fund’s net
asset value, closed-end funds frequently
trade at a discount to their net asset value
in the secondary market. Certain of the
closed-end funds in the portfolio employ
the use of leverage, which increases the
volatility of such funds.
Certain of the closed-end funds invest in
TIPS. TIPS are subject to numerous risks
including changes in interest rates,
economic recession and deterioration of
the bond market or investors’ perception
Certain of the closed-end funds invest in MLPs. Investments in MLPs are subject to the risks generally applicable to companies in the energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. U.S. taxing authorities could challenge the trust's treatment of the MLPs for federal income tax purposes. These tax risks could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the trust's investments.
Certain of the closed-end funds invest in REITs. Companies involved in the real estate industry are subject to changes in the
real estate market, vacancy rates and competition, volatile interest rates and economic recession.
Certain of the closed-end funds invest in
MLPs. MLPs are subject to the risks
generally applicable to companies in the
energy and natural resources sectors,
including commodity pricing risk, supply
and demand risk, depletion risk and
exploration risk. U.S. taxing authorities
could challenge the trust’s treatment of
the MLPs for federal income tax purposes.
These tax risks could have a negative
impact on the after-tax income available
for distribution by the MLPs and/or the
value of the trust’s investments.
One of the closed-end funds invests 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.
An investment in foreign equities should be made with an understanding of the additional risks
involved with foreign issuers, such as currency fluctuations, political risk, 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.
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
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 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 closed-end funds invest in REITs. Companies involved in the real estate industry
are subject to changes in the real estate market, vacancy rates and competition, volatile interest
rates and economic recession.
Certain of the closed-end 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 rise during the life of
Certain of the closed-end 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 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 invest in U.S. Treasury obligations which are subject to
numerous risks including higher interest rates, economic recession and deterioration of the bond
market or investors’ perceptions thereof.
For a discussion of additional risks of investing in the trust see the “Risk Factors” section of
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.
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
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.