Senior Loan & Limited Duration Opportunities Closed-End, Series 74
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 and limited duration bonds.
This unit investment trust seeks high current income by investing in a diversified
portfolio of closed-end funds which invest in senior loan and limited duration fixed-income
securities; however, there is no assurance the objective will be met.
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 closed-end funds 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 closed-end funds 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.
Since closed-end funds maintain a relatively fixed pool of investment
capital, portfolio managers are better able to adhere to their investment philosophies through greater
flexibility and control. In addition, closed-end funds don’t have to manage fund liquidity to meet
potentially large redemptions.
Closed-end funds are structured to generally provide a more
stable income stream than other managed investment products because they are not subjected to cash
inflows and outflows, which can dilute dividends over time. However, as a result of bond calls,
redemptions and advanced refundings, which can dilute a fund’s income, the portfolio cannot guarantee
| 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 closed-end funds.
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 of the closed-end funds employ the use of leverage, which increases the volatility of such funds.
All of the closed-end 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. In 2017, the United Kingdom’s Financial
Conduct Authority announced that LIBOR will cease to be available for use after 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 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 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 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/
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 not rise during the life of the trust.
Certain of the closed-end funds invest in mortgage-backed securities. Rising interest rates tend to extend the duration of mortgage-backed securities, making them more sensitive to changes in interest rates, and may reduce
the market value of the securities. In addition, mortgage-backed securities are subject to prepayment risk, the risk that borrowers may pay off their mortgages sooner than expected, particularly when interest rates decline.
Certian funds invest in preferred
securities. Preferred securities are equity securities of the issuing company which pay income in the form
of dividends. Preferred securities are typically subordinated to bonds and other debt instruments in a
company’s capital structure, and therefore will be subject to greater credit risk than those debt instruments.
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
Certain of the closed-end funds invest in covenant-lite loans which contain fewer or no maintenance
covenants and may hinder the closed-end funds’ ability to reprice credit risk and mitigate potential loss
especially during a downturn in the credit cycle.
Certain of the closed-end funds invest in securities issued by foreign issuers. Such securities are subject to certain risks including 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.
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 cybersecurity.
The COVID-19 global pandemic has resulted in major disruptions to economies and markets around the world. Financial markets have experienced extreme volatility and severe losses, negatively impacting global economic
growth prospects. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty and may exacerbate other political, social and economic risks.
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 organizational costs.
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.