Tax Exempt Municipal Income Trust, Series 338

Municipal Bond Basics

A municipal bond is a debt obligation of a state and/or local government entity which is used to help build America’s infrastructure by raising money to finance public projects such as new hospitals, schools and road improvements. In return, investors in tax-exempt municipal bonds receive earnings which are free from federal income taxes and, in some cases, state and local income taxes. Because of their low correlation to many other fixed-income and equity assets, municipal bonds can also provide diversification benefits within an investor’s portfolio.

Municipal bonds have historically had a very low overall default rate as compared to corporate bonds. According to data from Moody’s, the historical default rate of Moody’s-rated municipal bonds is lower than that of corporate bonds in every rating category. In fact, despite the economic struggles facing many states and municipalities, investment-grade municipal bonds have experienced significantly lower default rates than even the highest rated corporate bonds.

One reason for the historically lower default rates has been the relatively more stable revenue streams of municipalities, which have the ability to levy taxes to offset declining revenues. Corporate revenues, on the other hand, can be more volatile as corporations have fewer ways to increase revenues during difficult economic periods. Of course, given the current economic environment, there can be no assurance that the default rate for municipal bonds will not rise or that volatility will not increase.

Tax-Advantaged Income

Tax-exempt municipal bonds provide investors with significant tax savings. For investors in higher tax brackets, municipals can offer greater after-tax yields than taxable debt securities of similar maturities and credit quality, including Treasuries and corporate bonds. Taxable-equivalent yields represent the amount of pre-tax return an investor would need to earn in a taxable investment in order to equal that of a tax-exempt investment. The chart to the right illustrates the taxable-equivalent yield at five different federal income tax levels using a tax-exempt municipal bond with a 4.00% yield as an example. As you can see, if an investor is in the 22% federal tax bracket, the 4.00% yield has a taxable-equivalent yield of 5.13%. In other words, an investor would need to get a 5.13% yield from a taxable bond to equal the 4.00% payout of the tax-free municipal bond.

Portfolio Objectives

The objectives of this unit investment trust are to distribute income that is exempt from federal and, in certain instances, state and local income taxes and to preserve capital by investing in a portfolio of investment grade tax-exempt municipal bonds. There is, however, no assurance that the objectives will be achieved.

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 associated with an investment in municipal bonds. Municipal bonds are subject to numerous risks including rising interest rates, economic recession, deterioration of the municipal bond market, possible downgrades, increased volatility, reduced liquidity and defaults of interest and/or principal.

Certain of the securities in the trust are covered by insurance policies obtained by the issuers or underwriters of the bond from insurance companies. There can be no assurance that any insurer will be able to satisfy its commitments in the event claims are made in the future.

This UIT is a buy and hold strategy and investors should consider their ability to hold the trust until maturity.

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. The markets for credit instruments, including municipal securities, have experienced periods of extreme illiquidity and volatility.

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.

Ongoing armed conflicts between Russia and Ukraine in Europe and among Israel, Hamas and other militant groups in the Middle East, have caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, the Middle East and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain investments as well as performance.

A public health crisis, and the ensuing policies enacted by governments and central banks in response, could cause significant volatility and uncertainty in global financial markets, negatively impacting global growth prospects.