Risks and Considerations

Certain Key Risks:

Interest Rate and Liquidity Risk: Box spreads used in the Synthetic Borrow strategy have a fixed payoff at a future date, making them economically similar to zero-coupon bonds. The short box spread used in the strategy is subject to interest rate risks meaning that its mark-to-market value may fluctuate as interest rates and broader market conditions change. While the final payoff of the box spread is fixed, interim valuations can move in response to shifts in rates. The ability to purchase or sell box spreads effectively is dependent on the availability and willingness of other market participants to transact in box spreads at competitive prices. If the box spread is closed or downsized before expiration, the payoff amount owed by the investor may be greater than the fixed payoff at the original expiration date. This could cause the investor to realize a higher implied borrowing rate than the amount that was in place at the original expiration date. 

Market Risk: The amount of net premium, repayment amount, borrowing rate and duration available will differ in future market conditions and there is no guarantee that the same terms will be available to any investor seeking to utilize this strategy.

Margin Risk: If the equity in an investors account falls below the minimum maintenance requirements set by the custodian, a margin call will be issued, requiring the investor to deposit additional cash or acceptable collateral to maintain the trade. Failure to do so may result in the sale of some or all securities to protect the position. Such liquidation may occur at unfavorable prices, resulting in losses. The advisor to the account must maintain margin in the account at all times to sufficiently collateralize the options positions. Margin amounts are determined by the custodian and must be monitored by the advisor to the account. Vest will have no responsibility to monitor margin requirements for any account and will have no responsibility for any losses to accounts caused by inadequate maintenance of margin in the accounts.

Trading Risk: There is no guarantee that Vest will be able to execute a box spread transaction on any given day or at anticipated pricing levels. Market conditions, including volatility, liquidity constraints, or changes in interest rates, may prevent execution or result in execution at less favorable prices. Trading may be delayed, suspended, or otherwise restricted due to exchange-imposed halts, order imbalances, or operational issues. In certain market environments, it may not be possible to establish, adjust, or close a box spread position without incurring significant costs or losses.

Other Risks and Considerations: 

There is no assurance that a separately managed account (“SMA”) will achieve its investment objective. Accordingly, you can lose money investing in an SMA.  SMAs are subject to market risk, which is the possibility that the market values of the securities in an account will decline and that the value of the securities may therefore be less than what you paid for them. The value of investments held by the strategy may increase or decrease in response to economic, financial, and political events (whether real, expected, or perceived) in the U.S. and global markets. It is difficult to predict the timing, duration, and potential adverse effects (e.g., portfolio liquidity) of events. 

Fees associated with SMAs can be higher than mutual funds and ETFs that include manager, service, and advisory fees. Being able to withdraw cash from an SMA may be delayed due to the amount and type of positions to be sold.  Withdrawals may negatively impact the SMA’s performance.

Writing and buying options are speculative activities and entail investment exposures that are greater than their cost would suggest, meaning that a small investment in an option could have a substantial impact on performance. The use of call and put options can lead to losses because of adverse movements in the price or value of the underlying stock, index, or other asset, which may be magnified by certain features of the options. These risks are heightened when options are used to enhance a client’s return or as a substitute for a position or security. When selling a call or put option, a client will receive a premium; however, this premium may not be enough to offset a loss incurred by the client if the price of the underlying asset is above or below, the strike price, respectively, by an amount equal to or greater than the premium. The value of an option may be adversely affected if the market for the option becomes less liquid or smaller and will be affected by changes in the value or yield of the option’s underlying asset, an increase in interest rates, a change in the actual or perceived volatility of the stock market or the underlying asset and the remaining time to expiration. 

Writing a call or put option can lead to an assignment upon an exercise of a call or put option. In the case of a short call, an assignment can lead to a forced sale of the underlying security being held as collateral. Being short a put can lead to a forced purchase of the underlying security for which additional capital may have to be contributed by the account holder (i.e., “margin call”). Such involuntary sale and purchase transaction may occur at inopportune market times, which could result in losses to an account. 

In the case of an option purchase (long call or long put), a client’s entire initial investment of premium can be lost. In the case of a covered option short sale (short call or short put), upside gains can be limited by the sale of a short call against an underlying stock position and a forced purchase of stock can occur in the case of a short cash covered put sale. In the case of a naked call or put sale (a call with no underlying stock position and a put with no cash to cover the possibility of a forced stock purchase) there is the risk of unlimited loss in the call position and substantial loss in the put position.

Options trading is not appropriate for all investors. Please refer to Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD), which discusses potential risks of options issued by the Options Clearing Corporation (OCC), which are typically listed on an exchange. Visit https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.

Options strategies that involve selling options contracts may lead to significant losses and the use of margin may amplify those losses. Using Margin as part of an investment strategy can be very risky and is not appropriate for everyone. Some of these strategies may expose you to losses that exceed your initial investment amount (i.e., you will owe money to your broker in addition to the investment loss).  Before investing in a strategy that uses margin account, you should fully understand that:

• You can lose more money than you have invested;
• You will be responsible for the full amount borrowed plus any commissions, fees, interest or other charges that you incur by trading or being on margin.
• You may have to deposit additional cash or securities in your account on short notice to cover market losses;
• You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities;
• Your account custodian may sell some or all of your securities without consulting you to pay off your margin loan;
• You are not entitled to choose which securities your account custodian sells in your accounts to cover your margin loan;
• Your account custodian can increase its margin requirements at any time and is not required to provide you with advance notice; and
• You are not entitled to an extension of time on a margin call.

Investment advisory services are provided by Vest Financial LLC (“Vest”), an investment advisory firm registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, Vest is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.

This summary is not intended to be tax or legal advice. This summary cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This summary is being used to support the promotion or marketing of the transactions herein. The taxpayer should consult an independent tax advisor.

Vest has entered into a contractual agreement with an affiliate, First Trust Portfolios L.P. (“First Trust”), to solicit investors in certain funds managed by Vest. In consideration of these services, First Trust receives a solicitation fee equal to 50% of the fee collected by Vest in connection with the strategy.  In addition, since First Trust’s affiliate, First Trust Capital Partners LLC, owns a controlling interest in Vest, First Trust will indirectly benefit from an increase in fees received by Vest. Since Vest’s management fees are based upon a percentage of assets under management, the more assets under management, the higher fee income to both Vest and First Trust.  In addition, due to such compensation, First Trust has an incentive to solicit strategies managed by Vest, resulting in a material conflict of interest which should be considered when making a decision to invest in an investment strategy managed by Vest.  First Trust will not be involved in any provision of management services by Vest.