The Guggenheim Discount Opportunity Strategy Portfolio of CEFs, Series 2 ("Trust") seeks to provide capital appreciation.
Past performance is no guarantee of future results. Investment returns and principal value will fluctuate with changes in market conditions. Investors' units, when redeemed, may be worth more or less than their original cost.
This information does not constitute an offer to sell or a solicitation of any offer to buy: nor shall there be any sale of these securities in any state where the offer, solicitation, or sale is not permitted.
Principal Investment Strategy
The Trust will invest in common shares of closed-end investment companies (“Closed-End Funds”) that are currently trading at a greater discount to their net asset value (“NAV Discount”) than their historical NAV Discount over the past two years. The Trust seeks capital appreciation by selecting Closed-End Funds that the Sponsor believes have the potential to narrow the gap between their current NAV Discount and their historical NAV Discount. The Trust portfolio will include a variety of Closed-End Funds, including general equity funds, taxable fixed-income funds and balanced/multi-asset funds. The Closed-End Funds will invest in securities of a variety of asset classes. These asset classes include, but are not limited to:
• high-yield securities or “junk” bonds;
• convertible securities;
• preferred securities;
• real estate investment trusts (“REITs”);
• senior loans;
• corporate bonds;
• government bonds;
• foreign securities, including securities of companies located in emerging markets; and
Please see “Principal Risks” and “Investment Risks” for a description of the risks of investing in each of these asset classes.
The Sponsor, with the assistance of Guggenheim Partners Investment Management, LLC ("GPIM"), an affiliate of Guggenheim Partners, LLC, has selected the securities to be included in the trust’s portfolio according to the selection criteria described below.
See “Investment Policies” in Part B of the prospectus for additional information.
The Trust’s portfolio was constructed and the securities were selected two business days prior to the initial date of deposit (the “Inception Date”) according to the selection criteria described below. The security selection process begins by identifying the entire universe of U.S.-listed Closed-End Funds as provided by Morningstar.
As of the security selection date, each Closed-End Fund is then ranked on a scale of 1 through 10 for each the two factors listed below, where “1” represents the 10% of Closed-End Funds ranked highest in a given factor and “10” represents the 10% of Closed-End Funds ranked lowest in a given factor.
• Current NAV Discount compared to the Average NAV Discount from prior 24 months (with minimum of 18 months of trading history required for securities with less than 24 months trading history), as sourced from the Capital IQ Compustat database.
• Trailing six month total return, as sourced from FactSet. The 40 Closed-End Funds with the best average of the two rankings (where ties are broken by selecting the Closed-End Fund with the higher trading liquidity) will be selected for the trust portfolio, subject to the following constraints (as measured on the security selection date). Trading liquidity is measured by the median daily dollar volume (daily volume times closing daily price) over the prior 30 trading days, as sourced from FactSet. For the constraints regarding Closed-End Fund classifications, every Closed-End Fund in the applicable universe is assigned an overall asset class category and fund objective category based on confirmation between Morningstar and Lipper categories. When the Morningstar & Lipper categories do not match, then the fund’s stated investment objective is used to determine if the fund should be included in a given category.
• Minimum per share price of $5 as of the selection date;
• Exclude Closed-End Funds that have a net asset value of less than $100 million;
• Exclude securities with trading liquidity of less than $400,000 (or less than the median trading liquidity of the entire Closed-End Fund starting universe if that is less than $400,000). Trading liquidity is measured by the median daily dollar volume (daily volume times closing daily price) over the prior 30 trading days, as sourced from FactSet.
• Exclude Closed-End Funds in the initial universe ranked in the worst 20% in each of the following three metrics: 1. Current NAV Discount (a lower security price versus NAV is better) 2. Current NAV Discount compared to the Closed-End Fund’s two-year historical NAV Discount (a current price-to-NAV discount that is deeper than the average historical price-to-NAV discount is better) 3. Six-month market price momentum (higher 6 month total return is better)
• No more than 50% of the Trust portfolio will comprise Closed-End Funds classified as equity funds, which are Closed-End Funds that are focused solely on the Equity asset class (including equity derivitives);
• No more than 50% of the Trust portfolio will comprise Closed-End Funds classified as taxable fixed-income funds, which are Closed-End Funds that are focused solely on the Fixed Income asset class, with investment objectives that indicate that the funds focus on bonds which are not exempt from U.S. income taxes;
• No more than 30% of the Trust portfolio will comprise Closed-End Funds classified as balanced/multi-asset funds, which are Closed-End Funds that do not have a single asset class focus, i.e., they invest in both equities and fixed income;
• No more than 20% of the Trust portfolio will comprise Closed-End Funds classified as tax-exempt fixed-income funds, which are Closed-End Funds that are focused solely on the Fixed Income asset class, with investment objectives that indicate that the funds focus on municipal bonds which are exempt from U.S. income taxes; and
• No more than 15% of the Trust portfolio will comprise Closed-End Funds in any single fund objective category. Once a particular portfolio weight limit has been reached when selecting from top ranked securities, then any subsequently ranked Closed-End Fund that violates the limit will be skipped.
The 40 Closed-End Funds selected for the portfolio will be equally-weighted as of the selection date.
Please note that due to the fluctuating nature of security prices, the weighting of an individual security or sector in the trust portfolio may change after the selection date. Some of the securities held by the Closed- End Funds are income-producing securities, including corporate bonds, preferred securities and high-yield bonds. High-yield or “junk” bonds, the generic names for bonds rated below investment-grade, are frequently issued by corporations in the growth stage of their development or by established companies who are highly leveraged or whose operations or industries are depressed. Obligations rated below investment-grade should be considered speculative as these ratings indicate a quality of less than investment-grade. Because high-yield bonds are generally subordinated obligations and are perceived by investors to be riskier than higher rated securities, their prices tend to fluctuate more than higher rated securities and are affected by short-term credit developments to a greater degree.
See “Description of Ratings” in Part B of the prospectus for additional information regarding the ratings criteria.
Risks and Other Considerations
As with all investments, you may lose some or all of your investment in the Trust. No assurance can be given that the Trust’s investment objective will be achieved. The Trust also might not perform as well as you expect. This can happen for reasons such as these: • Securities prices can be volatile. The value of your investment may fall over time. Market value fluctuates in response to various factors. These can include stock market movements, purchases or sales of securities by the Trust, government policies, litigation, and changes in interest rates, inflation, the financial condition of the securities’ issuer or even perceptions of the issuer. Units of the Trust are not deposits of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
• Due to the current state of the economy, 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. Starting in December 2007, economic activity declined across all sectors of the economy, and the United States experienced increased unemployment. The economic crisis affected the global economy with European and Asian markets also suffering historic losses. Standard & Poor’s Rating Services lowered its longterm sovereign credit rating on the United States to “AA+” from “AAA,” which could lead to increased interest rates and volatility. Extraordinary steps have been taken by the governments of several leading countries to combat the economic crisis; however, the impact of these measures is not yet fully known and cannot be predicted.
• The Trust includes Closed-End Funds. Closed-End Funds are actively managed investment companies that invest in various types of securities. Closed-End Funds issue common shares that are traded on a securities exchange. Closed-End Funds are subject to various risks, including management’s ability to meet the Closed-End Fund’s investment objective and to manage the Closed-End Fund’s portfolio during periods of market turmoil and as investors’ perceptions regarding Closed-End Funds or their underlying investments change. Closed- End Funds are not redeemable at the option of the shareholder and they may trade in the market at a discount to their net asset value. Closed-End Funds may also employ the use of leverage which increases risk and volatility. Instability in the auction rate preferred shares market may affect the volatility of Closed-End Funds that use such instruments to provide leverage.
• The Closed-End Funds are subject to annual fees and expenses, including a management fee. Unitholders of the trust will bear these fees in addition to the fees and expenses of the trust. See “Fees and Expenses” for additional information.
• Certain Closed-End Funds held by the Trust invest in common stocks. Common stocks represent a proportional share of ownership in a company. Common stock prices fluctuate for several reasons including changes in investors’ perceptions of the financial condition of an issuer, changes in the general condition of the relevant stock market, such as the market volatility recently exhibited, or when political or economic events affect the issuers. Common stock prices may also be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase.
• The value of the fixed-income securities in the Closed-End Funds will generally fall if interest rates, in general, rise. Typically, fixed-income securities with longer periods before maturity are more sensitive to interest rate changes.
• A Closed-End Fund or an issuer of securities held by a Closed-End Fund may be unwilling or unable to make principal payments and/or to declare distributions in the future, may call a security before its stated maturity, or may reduce the level of distributions declared. This may result in a reduction in the value of your units.
• The financial condition of a Closed- End Fund or an issuer of securities held by a Closed-End Fund may worsen, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering period.
• Certain Closed-End Funds held by the Trust invest in securities that are rated below investment-grade and are considered to be “junk” securities. Below investment-grade obligations are considered to be speculative and are subject to greater market and credit risks, and accordingly, the risk of non-payment or default is higher than with investmentgrade securities. In addition, such securities may be more sensitive to interest rate changes and more likely to receive early returns of principal.
• Certain Closed-End Funds held by the Trust may invest in securities that are rated as investment-grade by only one rating agency. As a result, such splitrated securities may have more speculative characteristics and are subject to a greater risk of default than securities rated as investment-grade by more than one rating agency.
• Certain Closed-End Funds held by the Trust invest in senior loans. Borrowers under senior loans may default on their obligations to pay principal or interest when due. This nonpayment would result in a reduction of income to the applicable Closed-End Fund, a reduction in the value of the senior loan experiencing non-payment and a decrease in the net asset value of the Closed-End Fund. Although senior loans in which the Closed-End Funds invest may be secured by specific collateral, there can be no assurance that liquidation of collateral would satisfy the borrower’s obligation in the event of non-payment of scheduled principal or interest or that such collateral could be readily liquidated. Senior loans in which the Closed-End Funds invest: — generally are of below investmentgrade credit quality; — may be unrated at the time of investment; — generally are not registered with the Securities and Exchange Commission (“SEC”) or any state securities commission; and — generally are not listed on any securities exchange. In addition, the amount of public information available on senior loans generally is less extensive than that available for other types of assets.
• Certain Closed-End Funds held by the Trust invest in REITs and other real estate securities. REITs may concentrate their investments in specific geographic areas or in specific property types, such as hotels, shopping malls, residential complexes and office buildings. The value of the REIT and the ability of the REIT to distribute income may be adversely affected by several factors, including: rising interest rates; changes in the national, state and local economic climate and real estate conditions; perceptions of prospective tenants about the safety, convenience and attractiveness of the properties; the ability of the owner to provide adequate management, maintenance and insurance; the cost of complying with the Americans with Disabilities Act; increased competition from new properties; the impact of present or future environmental legislation and compliance with environmental laws; changes in real estate taxes and other operating expenses; adverse changes in governmental rules and fiscal policies; adverse changes in zoning laws; declines in the value of real estate; the downturn in the subprime mortgage lending market and real estate markets in the United States; and other factors beyond the control of the issuer of the REIT.
• Certain Closed-End Funds held by the Trust invest in preferred securities. Preferred securities are typically subordinated to bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and therefore will be subject to greater credit risk than those debt instruments.
• Certain Closed-End Funds held by the Trust may invest in convertible securities. Convertible securities generally offer lower interest or dividend yields than non-convertible fixed-income securities of similar credit quality because of the potential for capital appreciation. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, a convertible security’s market value also tends to reflect the market price of the common stock of the issuing company, particularly when that stock price is greater than the convertible security’s “conversion price.” Convertible securities fall below debt obligations of the same issuer in order of preference or priority in the event of a liquidation and are typically unrated or rated lower than such debt obligations.
• Certain Closed-End Funds held by the Trust invest in call options. The call writing portion of the investment strategy of the Closed-End Funds may not be successful in that the Closed-End Funds may not realize the full appreciation of stocks on which the Closed-End Funds have written call options. The ability to successfully implement the Closed-End Fund’s investment strategy depends on the Closed-End Fund’s adviser’s ability to predict pertinent market movements, which cannot be assured.
• The value of a call option held by a Closed-End Fund may be adversely affected if the market for the option becomes less liquid or smaller. The value of an option 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.
• Certain Closed-End Funds held by the Trust invest in foreign securities. Investment in foreign securities presents additional risk. Foreign risk is the risk that foreign securities will be more volatile than U.S. securities due to such factors as adverse economic, currency, political, social or regulatory developments in a country, including government seizure of assets, excessive taxation, limitations on the use or transfer of assets, the lack of liquidity or regulatory controls with respect to certain industries or differing legal and/or accounting standards.
• Certain Closed-End Funds held by the Trust invest in securities issued by companies headquartered or incorporated in countries considered to be emerging markets. Emerging markets are generally defined as countries with low per capita income in the initial stages of their industrialization cycles. Risks of investing in developing or emerging countries include the possibility of investment and trading limitations, liquidity concerns, delays and disruptions in settlement transactions, political uncertainties and dependence on international trade and development assistance. Companies headquartered in emerging market countries may be exposed to greater volatility and market risk.
• Closed-End Funds held by the Trust invest in municipal bonds. Municipal bonds are long-term fixed rate debt obligations that decline in value with increases in interest rates, an issuer’s worsening financial condition, a drop in bond ratings or when there is a decrease in the federal income tax rate. Typically, bonds with longer periods before maturity are more sensitive to interest rate changes. Municipal bonds generally generate income exempt from federal income taxation, but may be subject to the alternative minimum tax. In addition, some or all of the income generated by a Closed-End Fund may not be exempt from regular federal or state income taxes and as a result, the related income paid by the trust may also be subject to regular federal and state income taxes. Capital gains, if any, may be subject to tax.
• Certain Closed-End Funds held by the Trust invest in securities issued by small-capitalization and mid-capitalization companies. These securities customarily involve more investment risk than securities of large-capitalization companies. Small-capitalization and mid-capitalization companies may have limited product lines, markets or financial resources and may be more vulnerable to adverse general market or economic developments.
• Current economic conditions may lead to limited liquidity and greater volatility. The markets for fixed-income securities, such as those held by the Closed-End Funds, may experience periods of illiquidity and volatility. General market uncertainty and consequent repricing risk have led to market imbalances of sellers and buyers, which in turn have resulted in significant valuation uncertainties in a variety of fixed-income securities. These conditions resulted, and in many cases continue to result in, greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many debt securities remaining illiquid and of uncertain value. These market conditions may make valuation of some of the securities held by a Closed-End Fund uncertain and/or result in sudden and significant valuation increases or declines in its holdings.
• Inflation may lead to a decrease in the value of assets or income from investments.
• The Sponsor does not actively manage the portfolio. The Trust will generally hold, and may, when creating additional units, continue to buy, the same securities even though a security’s outlook, market value or yield may have changed.
See “Investment Risks” in Part A of the prospectus and “Risk Factors” in Part B of the prospectus for additional information.
Please see the Trust prospectus for more complete risk information.
Unit Investment Trusts are fixed, not actively managed and should be considered as part of a long-term strategy. Investors should consider their ability to invest in successive portfolios, if available, at the applicable sales charge. UITs are subject to annual fund operating expenses in addition to the sales charge. Investors should consult an attorney or tax advisor regarding tax consequences associated with an investment from one series to the next, if available, and with the purchase or sale of units. Guggenheim Funds Distributors, LLC does not offer tax advice.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
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