Diversified Equity Strategic Allocation Portfolio, 3rd Quarter 2020 Series

The Diversified Equity Strategic Allocation Portfolio is a unit investment trust which is designed to provide broad equity diversification by investing in common stocks across various market capitalizations, growth and value styles, sectors and countries. The trust invests in a fixed portfolio of stocks which are selected by applying pre-determined screens and factors and holds the stocks for approximately 15 months. The trust seeks above-average total return; however, there is no assurance the objective will be met.

A Tactical Approach To Security Selection

When selecting stocks for the portfolio we apply a proprietary rules-based selection process which analyzes stocks to assess valuations based on multiple factors. Our goal is to identify stocks which exhibit the fundamental characteristics that enable them to provide the greatest potential for capital appreciation.

1. Identify The Universe Of Eligible Stocks

The first step in our selection process is to establish a universe of stocks from which the portfolio will be selected. The universe is divided into seven distinct styles consisting of six domestic equity asset classes and one international equity asset class.

The domestic universe is established by identifying the 3,000 largest U.S. stocks (excluding limited partnerships, royalty trusts, regulated investment companies and business development companies) and then separating them into large-cap (largest 10%), mid-cap (next 20%), and small-cap (remaining 70%). The stocks in each group are then divided evenly between growth and value by their price-to-book ratios to establish the universe of stocks eligible for selection from within each asset class. In the case of the small-cap universe, only the 250 largest stocks with a minimum average daily trading volume of $1,000,000 within each growth and value group are included to ensure sufficient liquidity. The international universe consists of the 100 largest companies from developed nations which are ADRs or directly listed in the United States.


2. Apply The Rules-Based Stock Selection Models

We then rank the stocks within each of the seven universes based on two multi-factor models. Half of a stock’s ranking is based on a risk model and the remaining half is based on a model which is determined by their style designation. Value and international stocks are ranked on one model while growth stocks are ranked using a separate model.



3. Select The Highest Scoring Stocks

The 30 stocks with the best overall ranking from each of the seven style classes are selected for the portfolio, subject to a maximum of six stocks from any one of the major market sectors. The financials and real estate sectors are combined for the sector limit purpose. The seven style classes are approximately weighted based on the allocation shown below. Stocks are approximately equally weighted within their style.


Standard Deviations* Average Annual Total Returns*
S&P 1500 Index Strategy S&P 1500 Index Strategy
Since 1996 14.85% 13.00% 9.37% 9.86%
20 years 14.62% 12.64% 6.43% 7.98%
15 years 14.03% 12.70% 9.06% 8.25%
10 years 12.64% 11.22% 13.50% 10.68%
5 years 12.08% 10.17% 11.44% 8.00%
3 years 12.28% 10.82% 14.63% 9.44%
*Through 12/31/19

Annual Total Returns
Year S&P 1500 Index Strategy
1996 22.30% 15.82%
1997 32.93% 27.76%
1998 26.32% 14.37%
1999 20.24% 21.53%
2000 -6.96% 4.34%
2001 -10.63% -0.66%
2002 -21.30% -11.21%
2003 29.55% 29.27%
2004 11.76% 18.72%
2005 5.65% 13.94%
2006 15.31% 11.87%
2007 5.53% 11.47%
2008 -36.72% -32.43%
2009 27.24% 24.04%
2010 16.39% 13.54%
2011 1.72% 2.56%
2012 16.13% 8.13%
2013 32.77% 31.88%
2014 13.05% 13.13%
2015 1.01% 1.76%
2016 12.99% 10.13%
2017 21.10% 18.15%
2018 -4.97% -9.51%
2019 30.87% 22.61%
07/31/20 1.24% -7.37%

Past performance is no guarantee of future results and the actual current performance of the portfolio may be lower or higher than the hypothetical performance of the strategy. Hypothetical returns for the strategy in certain years were significantly higher than the returns of the S&P 1500 Index. Hypothetical strategy returns were the result of certain market factors and events which may not be replicated in the future. You can obtain performance information which is current through the most recent month-end by calling First Trust Portfolios L.P. at 1-800-621-1675 option 2. Investment return and principal value of the portfolio will fluctuate causing units of the portfolio, when redeemed, to be worth more or less than their original cost.

Simulated strategy returns are hypothetical, meaning that they do not represent actual trading, and, thus, may not reflect material economic and market factors, such as liquidity constraints, that may have had an impact on actual decision making. The hypothetical performance is the retroactive application of the strategy designed with the full benefit of hindsight. Strategy returns reflect a sales charge of 1.85% and estimated annual operating expenses of 0.185%, plus organization costs, but not taxes or commissions paid by the portfolio to purchase securities. Strategy returns assume that dividends are reinvested semi-annually while index returns assume dividends are reinvested monthly. Actual portfolio performance will vary from that of investing in the strategy stocks because it may not be invested equally in these stocks and may not be fully invested at all times. It is important to note that the strategy may underperform the S&P 1500 Index in certain years and may produce negative results.

The S&P 1500 Index is an unmanaged index of 1500 stocks representing the large cap, mid cap and small cap segments of the U.S. equity market. The index cannot be purchased directly by investors.

Standard Deviation is a measure of price variability (risk). A higher degree of variability indicates more volatility and therefore greater risk.

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.

Risk Considerations

An investment in this unmanaged unit investment trust should be made with an understanding of the risks involved with owning common stocks, 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.

Certain of the securities in the portfolio are issued by Real Estate Investment Trusts (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.

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.

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.

Large capitalization companies may grow at a slower rate than the overall market.

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.

The recent outbreak of a respiratory disease designated as COVID-19 was first detected in China in December 2019. The global economic impact of the COVID-19 outbreak is impossible to predict but is expected to disrupt manufacturing, supply chains and sales in affected areas and negatively impact global economic growth prospects. The COVID-19 outbreak has also caused significant volatility and declines in global financial markets, which have caused losses for investors. The impact of the COVID-19 outbreak may be short term or may last for an extended period of time, and in either case could result in a substantial economic downturn or recession.

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.

Although this unit investment trust 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.