equity investing-ui ts
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TRANSCRIPT
UITs
You should consider a trust’s investment objective, 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 a trust. Read it carefully before you invest.
Not FDIC Insured • Not Bank Guaranteed • May Lose Value Not a Deposit • Not Insured By Any Federal Government Agency
First Trust Portfolios L.P. • Member SIPC • Member FINRA
Equity Investing With Unit Investment Trusts
First Last, TitleCompany Name
Equity Investing with UITs
1Units may be redeemed on any business day at the redemption price which may be more or less than the original purchase price.2Only available for companies with dividend reinvestment plans.3There are costs associated with an investment in each type of security. Consult your brokerage firm and/or the security’s prospectus (if applicable) for complete details.4Investing involves risk, including possible loss of principal. Please see Risk Considerations in the prospectus for risks specific to the unit investment trusts mentioned in this presentation.
UIT Comparison
Fully invested
Known portfolio
Daily liquidity
Convenience
Professional selection
Reinvestment options
Managed portfolio
Supervised portfolio
Sales Charges, fees, and/or expenses3
Risks4
Individual Securities
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Mutual Funds
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UITs
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The portfolios presented in this seminar are offered as UITs. UITs have many unique characteristics. Below is a comparison of UITs to Mutual Funds and Individual Securities.
Equity Investing with UITs
Risk ConsiderationsThere is no assurance an unmanaged unit investment trust will achieve its investment objective(s). An investment in a unit investment trust is subject to market risk. Market risk is the risk that a particular security owned by a trust may fall in value.
Trusts which invest in common stocks are subject to certain risks, including the risk that the financial condition of the issuers of the stocks or the general condition of the stock market may worsen.
Trusts which invest in foreign securities are subject to certain risks, including currency fluctuations, political risks, 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 inemerging markets.
Trusts which are concentrated in individual sectors or industries are subject to additional risks, including limited diversification.
Trusts which invest in small–cap companies are subject to certain risks, as the share prices of small-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.
Short term strategy trusts should be considered as part of a long-term investment plan and you should consider your ability to pursue investing in successive portfolios, if available.
Equity Investing with UITs
Why Invest?
Examples of Financial Goals
College Tuition Buy a House Retirement
Grow Wealth Over Time
Equity Investing with UITs
The Effect of Inflation
As inflation rises, your dollar is worth less.
Housing
% change
1988-2012
(25 years)
94% 336% 214%
CollegeTuition & Fees Medical Care
Source: U.S. Department of Labor Bureau of Labor Statistics
Equity Investing with UITs
$0
$1
$10
$100
$1,000
$10,000
$100,000
For illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transaction costs. The timely payment of principal and interest of government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government. Bonds are typically intended to provide income and/or diversification. U.S. government bonds may be exempt from state taxes and income is taxed as ordinary income in the year received. Stocks are not guaranteed and have been more volatile than the other asset classes. Small company stocks are more volatile than large company stocks and are subject to significant price fluctuations. An investment cannot be made directly in an index. Past performance is no guarantee of future results.Small Company Stocks—represented by the fifth market capitalization quintile of stocks on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors, U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Treasury Bills—30-day U.S. Treasury Bill; Inflation—Consumer Price Index.
Ending Wealth
Avg. Annual Total Return
$18,365 11.9%
$3,525 9.8%
$123 5.7%
$21 3.5%$13 3.0%
Inflation
Treasury Bills
Government Bonds
Small Company Stocks
Large Company Stocks
Perspective: Value of $1 invested from 1926 - 2012
Equity Investing with UITs
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$0
$1
$10
$100
$1,000
$10,000
“Black Monday” Stock Market Crash of 1987
Pearl Harbor
Korean War Be-gan
Cuban Missile Crisis
Watergate Scan-dal
S&P 500 Index 1926 - 2012
For illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Stocks are not guaranteed and have been more volatile than the other asset classes. An investment cannot be made directly in an index. Past performance is no guarantee of future results.Large Company Stocks—Standard & Poor’s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general.
Stock Market Crash of 1929
JFK Assassination
$3,525
Average Annual Total Return: 9.8% Start of “Great Recession”
9/11 Terrorist Attacks on U.S.
WTC Bombing
Equity Investing with UITs
What’s Your Strategy?
Classic Investor Mistakes
Chasing ReturnsInvestors tend to jump on the bandwagon when securities are doing well.
Doing NothingHunkering down and refusing to make portfolio changes may drag performance results.
Going to CashYou don’t want to be sitting in cash when the rebound begins.
Resist Self-Defeating Behavior
Employ DisciplineRemoves the emotional factor from the decision making process.
RebalanceRebalancing “forces” you to periodically “sell high and buy low.”
Invest for the Long TermInvestors should consider investing for at least 3 to 5 years.
Chance or Discipline
Equity Investing with UITs
Diversification
Asset Allocation
Success Strategies
Periodically Rebalance
Invest for the Long-Term
Equity Investing with UITs
Why Diversify?
Source: Ibbotson Associates. Small stocks are represented by the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio; large stocks by the Standard & Poor’s 500 Index, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; government bonds by the 20-year U.S. government bond; Treasury bills by the 30-day U.S. Treasury bill; and international stocks by the MSCI EAFE Index, which is representative of the equity performance of developed markets outside of North America: Europe, Australasia and the Far East. This chart is for illustrative purposes only and not indicative of any actual investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
Equity Investing with UITs
Risk and Return
Source: Bloomberg, Barclays Capital. Stocks-Standard & Poor’s 500 Index, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; Bonds-Barclays Capital U.S. Aggregate Index covers the US dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. An investment cannot be made directly in an index. Past performance is no guarantee of future results. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
The Relationship Between Risk and Return of Stocks & Bonds (1983 – 2012)
Equity Investing with UITs
Importance of a Long-Term Perspective
Data Source: Prior to 1926 “A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability "William N.Goetzmann, Roger G. Ibbotson, Liang Peng, Yale School of Management, which was based on monthly stock prices plus dividends of more than 600 NYSE stocks. From 1926 to present, Ibbotson Associates Large Company Stocks which consists of the Standard & Poor’s 500 Index. 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. Historical performance figures for U.S. large-cap stocks are for illustrative purposes only. Returns are not intended to imply or guarantee future performance. These returns were the result of certain market factors and events which may not be repeated in the future.
10-Year Moving Average of U.S. Large-Cap Common Stock Nominal Total Returns (1825 – 2012)
1834
1839
1844
1849
1854
1859
1864
1869
1874
1879
1884
1889
1894
1899
1904
1909
1914
1919
1924
1929
1934
1939
1944
1949
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
-5%
0%
5%
10%
15%
20%
25%
2012
Equity Investing with UITs
Rebalancing: 50/50 Stock/Bond Allocation Example
Source: Bloomberg and Barclays Capital as of 12/31/12. Past performance is no guarantee of future results. Compound returns, standard deviation, and Sharpe ratios are all annualized. Stocks are represented by the Standard & Poor’s 500 Index, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; Bonds are represented by Barclays Capital U.S. Aggregate Index which covers the US dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Standard Deviation is a measure of price variability (risk). Sharpe Ratio is a measure of excess reward per unit of volatility.
Growth of $100,000
20-Yr Avg. Annual Return
20-Yr Standard Deviation
Sharpe Ratio
Rebalanced $446,394 7.77% 7.70% 0.53
Non- Rebalanced $413,323 7.35% 9.21% 0.41
Hypothetical Performance of a Rebalanced vs. Non-Rebalanced Portfolio – 1993 to 2012
The example is for illustrative purposes only and is not indicative of the future performance of any of any First Trust unit investment trust.
Year-End Stock Allocation of a Non-Rebalanced Portfolio
Equity Investing with UITs
Rebalancing Basics
A loss of 50% requires a gain of 100% to break even.
Portfolio transactions may lead to more costs incurred.
Consider tax implications.
Equity Investing with UITs
Knowledge Into Practice
Unit Investment Trusts (UITs) A UIT is a pooled investment vehicle in
which professionally-selected securities are deposited into the trust.
Equity Investing with UITs
What is a UIT?
Sponsor – the company that creates the trust Unit – represents an undivided ownership interest in the
assets contained in the trust Unit holder – an investor in the trust
Equity Investing with UITs
History
Major growth in the Unit Investment Trust (UIT) industry began in the 1970s.
Began primarily as fixed income bond trusts and have expanded to all areas of the investment world.
$550+ billion in new UIT deposits since 1990*
*Source: Investment Company Institute
Equity Investing with UITs
Trends in UIT Issuance
7%
93%
1990
90%
10%
2012
Source: 2009 Investment Company Fact Book; Investment Company Institute
Equity Debt
Total Deposits by Type
Source: Investment Company Institute
Equity Investing with UITs
A “Buy and Hold” Investment
Staying invested vs. market timing
Helps to eliminate emotional investing
Requires patience and discipline
Equity Investing with UITs
Source: DALBAR, Inc. Quantitative Analysis of Investor Behavior, 2012
The S&P 500 Index is an unmanaged group of stocks and considered to be representative of the U.S. stock market in general. An investment cannot be made directly in an index. Past performance is no guarantee of future results.
Average Equity Fund Investor S&P 500 Index0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
3.5%
7.8%
Annualized Returns (1992-2011)
“The investor’s
chief problem –
and even his worst
enemy – is likely to
be himself”
-Benjamin Graham
Buy and Sell vs. Buy and Hold
Equity Investing with UITs
Buy and Hold – Not Buy and Ignore
Proceeds in Cash In-kind DistributionRollover Proceeds (Rebalance)
$
Equity Investing with UITs
Nuts and Bolts
Diversification Asset Allocation Buy and Hold Rollover feature to facilitate
Rebalancing