Post-Effective Amendment to Designate a New Effective Date
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 485BXT Post-Effective Amendment 280 1.41M
2: EX-99.C HOLDERS RTS Amended and Restated Establishment and 6 25K
Designation of Series
3: EX-99.J OTHER OPININ Consent of Independent Registered Public 1 7K
Accounting Firm
4: EX-99.M 12B-1 PLAN Letter Agreement Regarding 12B-1 Fees 5± 31K
5: EX-99.P CODE ETH Code of Ethics - First Trust Advisors L.P., 14 38K
First Trust Portfolios L.P.
6: EX-99.P CODE ETH Funds Code of Ethics 11 32K
As filed with the Securities and Exchange Commission on April 30, 2014
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1933 Act Registration No. 333-125751
1940 Act Registration No. 811-21774
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 77 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 77 [X]
FIRST TRUST EXCHANGE-TRADED FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 621-1675
W. Scott Jardine, Esq., Secretary
First Trust Exchange-Traded Fund
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Name and Address of Agent for Service)
Copy to:
Eric F. Fess, Esq.
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 2014 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 77
This Post-Effective Amendment to the Registration Statement comprises the
following papers and contents:
The Facing Sheet
Part A - Prospectus for First Trust
Capital Strength ETF, First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund,
First Trust Dow Jones Internet Index Fund, First Trust Dow Jones Select MicroCap
Index Fund, First Trust ISE Chindia Index Fund, First Trust ISE-Revere Natural
Gas Index Fund, First Trust ISE Water Index Fund, First Trust Morningstar
Dividend Leaders Index Fund, First Trust NASDAQ-100 Equal Weighted Index Fund,
First Trust NASDAQ-100 Ex-Technology Sector Index Fund, First Trust
NASDAQ-100-Technology Sector Index Fund, First Trust NASDAQ(R) ABA Community
Bank Index Fund, First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund,
First Trust NYSE Arca Biotechnology Index Fund, First Trust S&P REIT Index Fund,
First Trust US IPO Index Fund, First Trust Value Line(R) 100 Exchange-Traded
Fund, First Trust Value Line(R) Dividend Index Fund and First Trust Value
Line(R) Equity Allocation Index Fund
Part B - Statement of Additional Information for First Trust
Capital Strength ETF, First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund,
First Trust Dow Jones Internet Index Fund, First Trust Dow Jones Select MicroCap
Index Fund, First Trust ISE Chindia Index Fund, First Trust ISE-Revere Natural
Gas Index Fund, First Trust ISE Water Index Fund, First Trust Morningstar
Dividend Leaders Index Fund, First Trust NASDAQ-100 Equal Weighted Index Fund,
First Trust NASDAQ-100 Ex-Technology Sector Index Fund, First Trust
NASDAQ-100-Technology Sector Index Fund, First Trust NASDAQ(R) ABA Community
Bank Index Fund, First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund,
First Trust NYSE Arca Biotechnology Index Fund, First Trust S&P REIT Index Fund,
First Trust US IPO Index Fund, First Trust Value Line(R) 100 Exchange-Traded
Fund, First Trust Value Line(R) Dividend Index Fund and First Trust Value
Line(R) Equity Allocation Index Fund
Part C - Other Information
Signatures
Index to Exhibits
Exhibits
FIRST TRUST
FIRST TRUST EXCHANGE-TRADED FUND
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FUND NAME TICKER SYMBOL EXCHANGE
First Trust Capital Strength ETF FTCS NASDAQ(R)
First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund VIXH NYSE Arca
First Trust Dow Jones Internet Index Fund FDN NYSE Arca
First Trust Dow Jones Select MicroCap Index Fund FDM NYSE Arca
First Trust ISE Chindia Index Fund FNI NYSE Arca
First Trust ISE-Revere Natural Gas Index Fund FCG NYSE Arca
First Trust ISE Water Index Fund FIW NYSE Arca
First Trust Morningstar Dividend Leaders Index Fund FDL NYSE Arca
First Trust NASDAQ-100 Equal Weighted Index Fund QQEW NASDAQ(R)
First Trust NASDAQ-100 Ex-Technology Sector Index Fund QQXT NASDAQ(R)
First Trust NASDAQ-100-Technology Sector Index Fund QTEC NASDAQ(R)
First Trust NASDAQ(R) ABA Community Bank Index Fund QABA NASDAQ(R)
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund QCLN NASDAQ(R)
First Trust NYSE Arca Biotechnology Index Fund FBT NYSE Arca
First Trust S&P REIT Index Fund FRI NYSE Arca
First Trust US IPO Index Fund FPX NYSE Arca
First Trust Value Line(R) 100 Exchange-Traded Fund FVL NYSE Arca
First Trust Value Line(R) Dividend Index Fund FVD NYSE Arca
First Trust Value Line(R) Equity Allocation Index Fund FVI NYSE Arca
Each of First Trust Capital Strength ETF, First Trust CBOE(R) S&P 500(R)
VIX(R) Tail Hedge Fund, First Trust Dow Jones Internet Index Fund, First Trust
Dow Jones Select MicroCap Index Fund, First Trust ISE Chindia Index Fund, First
Trust ISE-Revere Natural Gas Index Fund, First Trust ISE Water Index Fund, First
Trust Morningstar Dividend Leaders Index Fund, First Trust NASDAQ-100 Equal
Weighted Index Fund, First Trust NASDAQ-100 Ex-Technology Sector Index Fund,
First Trust NASDAQ-100-Technology Sector Index Fund, First Trust NASDAQ(R) ABA
Community Bank Index Fund, First Trust NASDAQ(R) Clean Edge(R) Green Energy
Index Fund, First Trust NYSE Arca Biotechnology Index Fund, First Trust S&P REIT
Index Fund, First Trust US IPO Index Fund, First Trust Value Line(R) 100
Exchange-Traded Fund, First Trust Value Line(R) Dividend Index Fund and First
Trust Value Line(R) Equity Allocation Index Fund (each, a "Fund" and
collectively, the "Funds") is a series of First Trust Exchange-Traded Fund (the
"Trust") and an exchange-traded index fund organized as a separate series of a
registered investment company.
Each Fund lists and principally trades its shares on either The NASDAQ
Stock Market ("NASDAQ(R)") or NYSE Arca, Inc. ("NYSE Arca"), an affiliate of
NYSE Euronext (each, an "Exchange" and collectively, the "Exchanges"). Market
prices may differ to some degree from the net asset value of the shares. Unlike
conventional mutual funds, each Fund issues and redeems shares on a continuous
basis, at net asset value, only in large specified blocks consisting of 50,000
shares (each block of shares issued and redeemed, called a "Creation Unit" and
collectively, the "Creation Units"). Each Fund's Creation Units are issued and
redeemed in-kind for securities in which the Fund invests and/or cash, and only
to and from broker-dealers and large institutional investors that have entered
into participation agreements.
EXCEPT WHEN AGGREGATED IN CREATION UNITS, THE SHARES ARE NOT REDEEMABLE
SECURITIES OF THE FUNDS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
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May 1, 2014
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TABLE OF CONTENTS
Summary Information
First Trust Capital Strength ETF (FTCS)....................................1
First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund (VIXH)...............5
First Trust Dow Jones Internet Index Fund (FDN)............................9
First Trust Dow Jones Select MicroCap Index Fund (FDM)....................13
First Trust ISE Chindia Index Fund (FNI)..................................17
First Trust ISE-Revere Natural Gas Index Fund (FCG).......................22
First Trust ISE Water Index Fund (FIW)....................................27
First Trust Morningstar Dividend Leaders Index Fund (FDL).................32
First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW)...................36
First Trust NASDAQ-100 Ex-Technology Sector Index Fund (QQXT).............40
First Trust NASDAQ-100-Technology Sector Index Fund (QTEC)................44
First Trust NASDAQ(R) ABA Community Bank Index Fund (QABA)................58
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund (QCLN)........52
First Trust NYSE Arca Biotechnology Index Fund (FBT)......................57
First Trust S&P REIT Index Fund (FRI).....................................61
First Trust US IPO Index Fund (FPX).......................................65
First Trust Value Line(R) 100 Exchange-Traded Fund (FVL)..................70
First Trust Value Line(R) Dividend Index Fund (FVD).......................74
First Trust Value Line(R) Equity Allocation Index Fund (FVI)..............78
Additional Information on the Funds' Investment Objectives and Strategies.....82
Additional Risks of Investing in the Funds....................................82
Fund Organization.............................................................84
Management of the Funds.......................................................85
How to Buy and Sell Shares....................................................86
Dividends, Distributions and Taxes............................................87
Federal Tax Matters...........................................................87
Distribution Plan.............................................................90
Net Asset Value...............................................................90
Fund Service Providers........................................................91
Index Providers...............................................................91
Disclaimers...................................................................91
Index Information.............................................................97
Premium/Discount Information.................................................122
Total Return Information.....................................................127
Financial Highlights.........................................................134
Other Information............................................................151
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SUMMARY INFORMATION
FIRST TRUST CAPITAL STRENGTH ETF (FTCS)
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INVESTMENT OBJECTIVE
The First Trust Capital Strength ETF (the "Fund") seeks investment results that
correspond generally to the price and yield (before the Fund's fees and
expenses) of an equity index called The Capital Strength Index(TM) (the
"Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.50%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.26%
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Total Annual Fund Operating Expenses 0.76%
Fee Waiver and Expense Reimbursement (2) 0.11%
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Total Net Annual Fund Operating Expenses After Fee Waiver
and Expense Reimbursement 0.65%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.65% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$66 $273 $511 $1,192
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(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.65% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.65% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 156% of the average value of its portfolio.
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FIRST TRUST CAPITAL STRENGTH ETF (FTCS)
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PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by The NASDAQ OMX Group, Inc.
(the "Index Provider"). In constructing the Index, the Index Provider begins
with the largest 500 U.S. companies included in the NASDAQ US Benchmark Index
and excludes the following: companies with less than $1 billion in cash and
short term investments; companies with long-term debt divided by market
capitalization greater than 30%; and companies with return on equity less than
15%. The Index Provider then ranks all remaining stocks in the universe by
one-year and three-month daily volatility (one-year and three-month daily
volatility factors are equally weighted), and selects the top 50 companies with
the lowest combined volatility score, subject to a maximum weight of 30% from
any one of the ten Industry Classification Benchmark industries. The stocks in
the Index are equally weighted initially and on each reconstituting and
rebalancing effective date. The Index is reconstituted and rebalanced on a
quarterly basis. The inception date of the Index was March 20, 2013. As of March
31, 2014, the Index was comprised of 50 securities.
NASDAQ(R) and The Capital Strength Index(TM) are trademarks (the "Marks") of The
NASDAQ OMX Group, Inc. (collectively with its affiliates "NASDAQ OMX"). The
Marks are licensed for use with the Fund by First Trust. The Fund has not been
passed on by NASDAQ OMX as to its legality or suitability. The Fund is not
issued, endorsed, sold, or promoted by NASDAQ OMX. The Fund should not be
construed in any way as investment advice by NASDAQ OMX. NASDAQ OMX makes no
warranties and bears no liability with respect to the Fund.
PRINCIPAL RISKS You could lose money by investing in the Fund. An investment in
the Fund is not a deposit of a bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency. There
can be no assurance that the Fund's investment objective will be achieved.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High portfolio turnover may result in the Fund paying higher levels of
transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause the Fund's performance to be less than you
expect.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
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FIRST TRUST CAPITAL STRENGTH ETF (FTCS)
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bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and underlying index returns for the one year, five year and since
inception periods ended December 31, 2013. The bar chart and table provide an
indication of the risks of investing in the Fund by showing changes in the
Fund's performance from year-to-year and by showing how the Fund's average
annual total returns based on net asset value compare to those of the underlying
index, a broad-based market index and a specialized securities market index. On
June 4, 2013 the Fund's underlying index changed from the Credit Suisse U.S.
Value Index, Powered by HOLT(TM) to The Capital Strength Index(TM). Therefore,
the Fund's performance and historical returns shown below are not necessarily
indicative of the performance that the Fund, based on the Index, would have
generated. Prior to June 19, 2010, the Fund's underlying index was the Deutsche
Bank CROCI US+ Index(TM). The inception date of the Index was March 20, 2013.
Returns for an underlying index are only disclosed for those periods in which
the index was in existence for the whole period. Since the Fund's new underlying
index had an inception date of March 20, 2013, it was not in existence for any
of the periods disclosed. See "Total Return Information" for additional
performance information regarding the Fund. The Fund's performance information
is accessible on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST CAPITAL STRENGTH ETF--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
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2007 10.26%
2008 -37.23%
2009 39.43%
2010 14.04%
2011 -2.94%
2012 17.45%
2013 35.90%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 20.75% and -22.37%, respectively, for the
quarters ended June 30, 2009 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
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FIRST TRUST CAPITAL STRENGTH ETF (FTCS)
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AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(7/6/2006)
Return Before Taxes 35.90% 19.76% 8.86%
Return After Taxes on Distributions 35.03% 19.01% 8.26%
Return After Taxes on Distributions and Sale of Shares 20.27% 15.74% 6.81%
The Capital Strength Index(SM)* (reflects no deduction for fees,
expenses or taxes) N/A N/A N/A
S&P 500(R) Index (reflects no deduction for fees, expenses or taxes) 32.39% 17.94% 7.38%
S&P 500(R) Value Index (reflects no deduction for fees, expenses
or taxes) 31.99% 16.61% 5.65%
* On June 18, 2010, the Fund's underlying index changed from the
Deutsche Bank CROCI(R) US+ Index(TM) to the Credit Suisse U.S. Value
Index, Powered by HOLT(TM). On June 4, 2013, the Fund's underlying
index changed from the Credit Suisse U.S. Value Index, Powered by
HOLT(TM) to The Capital Strength Index(SM). Since the Fund's new
underlying index had an inception date of March 20, 2013, it was not
in existence for any of the periods disclosed.
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NASDAQ(R) through a broker-dealer. Shares of the
Fund trade on NASDAQ(R) at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
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SUMMARY INFORMATION
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
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INVESTMENT OBJECTIVE
First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund (the "Fund") seeks
investment results that correspond generally to the price and yield, before the
Fund's fees and expenses, of an equity index called the CBOE(R) VIX(R) Tail
Hedge Index (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.60%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.00%
--------
Total Annual Fund Operating Expenses 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $238 $438 $1,018
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 4% of the average value of its portfolio.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets (plus the amount of
any borrowings for investment purposes) in common stocks and call options
included in the Index. The Fund, using an indexing investment approach, attempts
to replicate, before fees and expenses, the performance of the Index. First
Trust Advisors L.P. ("First Trust") seeks a correlation of 0.95 or better
(before fees and expenses) between the Fund's performance and the performance of
the Index; a figure of 1.00 would represent perfect correlation.
Pursuant to an arrangement with Chicago Board Options Exchange, Incorporated
("CBOE"), S&P Dow Jones Indices LLC ("SPDJI") has certain rights to license the
Index to third parties. SPDJI has licensed the Index to First Trust for use by
First Trust and the Fund. CBOE compiles, maintains and owns the Index. The Index
is designed to provide a benchmark for investors interested in hedging tail risk
(as described below) in an S&P 500 portfolio. As of March 31, 2014, the Index
was comprised of 500 securities.
The Index is composed of each of the equity securities comprising the S&P 500
and an out-of-the-money call option position on the Chicago Board Options
Exchange Market Volatility Index (the "VIX Index"). The VIX Index is quoted in
5
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FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
--------------------------------------------------------------------------------
percentage points, is calculated and disseminated in real-time by CBOE and is a
way of measuring the market's expectation of volatility in the S&P 500 over the
next 30-day period. Historically, the VIX Index has ranged in value from 0 to
100. As of the date of this prospectus, it has never exceeded a value of 100;
however, during periods of sustained extreme volatility, the Index value could
exceed 100. For example, a VIX Index level of 30 would represent an expected
annualized range of returns for the S&P 500 of 30%, either up or down, over the
next 30 days. A higher value in the VIX Index indicates greater expected
volatility in the S&P 500 over the next 30 days.
The Index, and in turn the Fund, tracks the performance of an S&P 500 stock
portfolio (with dividends reinvested), and call options on the VIX Index. The
amount of the Index allocated to call options on the VIX Index is reevaluated
and rebalanced each month, depending on the level of forward expected volatility
in the S&P 500, as measured by the closest to maturity VIX Index futures.
Depending upon this forward expected volatility, the Index, and in turn the
Fund, may allocate 0%, 0.5% or 1% of its portfolio to purchasing call options on
the VIX Index.
A steep and sudden drop in equity market prices, such as a downward move of 20%
or more in a month, is thought of as an unlikely or "tail" occurrence. The Index
is designed to help cope with these extreme downward movements in the market by
hedging its portfolio through purchasing call options on the VIX Index, or "tail
hedging." Historically, there has been a negative correlation between the VIX
Index and the S&P 500; during periods of time when the S&P 500 declines in
value, the VIX Index tends to rise. Therefore, the Fund's purchase of call
options on the VIX Index may offset some of the losses incurred in the S&P 500
due to a tail occurrence; however, there is no guarantee that the tail hedging
strategy utilized by the Index, and in turn the Fund, will offset such losses.
Additionally, under certain circumstances, the Index, and in turn the Fund, may
be invested only in stocks in the S&P 500, which would prevent the Fund from
hedging against any losses caused by increased volatility due to an unexpected
event.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
DERIVATIVES RISK. The use of options and other derivatives can lead to losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivatives.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
The option positions employed, as dictated by the attempt to replicate the
Index, may present additional risk. 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 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. Additionally, the value of an option does not increase or decrease
at the same rate as the underlying stock (although they generally move in the
same direction).
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
6
--------------------------------------------------------------------------------
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
--------------------------------------------------------------------------------
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past year as well as the average annual
Fund and Index returns for the one year and since inception periods ended
December 31, 2013. The bar chart and table provide an indication of the risks of
investing in the Fund by showing how the Fund's average annual total returns
based on net asset value compare to those of the Index and a broad-based market
index. See "Total Return Information" for additional performance information
regarding the Fund. The Fund's performance information is accessible on the
Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND--TOTAL RETURN
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2013 19.00%
During the one-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 7.58% and 0.71%, respectively, for the
quarters ended March 31, 2013 and June 30, 2013. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
7
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FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year Since Inception
(8/29/2012)
Returns Before Taxes 19.00% 12.70%
After Taxes on Distributions 18.20% 11.97%
After Taxes on Distributions and Sale of Shares 10.72% 9.38%
CBOE(R) VIX(R) Tail Hedge Index (reflects no deduction for fees,
expenses or taxes) 19.43% 13.15%
S&P 500(R) Index (reflects no deduction for fees, expenses or taxes) 32.39% 25.07%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust;
o Stan Ueland, Senior Vice President of First Trust;
o John Gambla, Senior Portfolio Manager, First Trust; and
o Rob A. Guttschow, Senior Portfolio Manager, First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2012.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
8
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust Dow Jones Internet Index Fund (the "Fund") seeks investment
results that correspond generally to the price and yield (before the Fund's fees
and expenses) of an equity index called the Dow Jones Internet Composite
Index(SM) (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.17%
--------
Total Annual Fund Operating Expenses 0.57%
Fee Waiver and Expense Reimbursement (2) 0.00%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.57%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$58 $228 $422 $982
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 17% of the average value of its portfolio.
9
--------------------------------------------------------------------------------
FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by S&P Dow Jones Indices LLC.
The Index is designed to include only companies whose primary focus is
Internet-related. To be eligible for inclusion in the Index, a company must
generate at least 50% of its revenues from Internet commerce or services. The
Index is divided between two types of Internet companies -- Internet commerce
companies and Internet services companies. Internet commerce companies are
defined as those that derive the majority of their revenues from providing goods
or services through an open network, whereas Internet services companies are
defined as those that derive the majority of their revenues from providing
access to the Internet or providing services to people using the Internet. As of
March 31, 2014, the Index included 24 Internet commerce company securities and
16 Internet services company securities. Though the total number of Index
constituents has usually remained at approximately 40 since the Index's
inception in February 1999, this number is not fixed, but rather may increase as
the market grows so as to cover at least 80% of Internet stocks market
capitalization. The Index includes the securities of small and mid cap
companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
INTERNET COMPANIES RISK. The Fund invests in the securities of Internet
companies. Internet companies are subject to rapid changes in technology,
worldwide competition, rapid obsolescence of products and services, loss of
patent protections, cyclical market patterns, evolving industry standards,
frequent new product introductions and the considerable risk of owning small
capitalization companies that have recently begun operations.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
10
--------------------------------------------------------------------------------
FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
--------------------------------------------------------------------------------
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and a specialized securities market index. See "Total Return
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST DOW JONES INTERNET INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 11.17%
2008 -44.02%
2009 79.23%
2010 36.63%
2011 -5.74%
2012 20.85%
2013 53.40%
11
--------------------------------------------------------------------------------
FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
--------------------------------------------------------------------------------
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 25.52% and -25.53%, respectively, for the
quarters ended September 30, 2010 and December 31, 2008. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(6/19/2006)
Return Before Taxes 53.40% 33.74% 15.72%
Return After Taxes on Distributions 53.40% 33.72% 15.70%
Return After Taxes on Distributions and Sale of Shares 30.22% 28.45% 13.08%
Dow Jones Internet Composite Index(SM) (reflects no deduction for
fees, expenses or taxes) 54.36% 34.54% 16.38%
S&P 500(R) Index (reflects no deduction for fees, expenses or taxes) 32.39% 17.94% 7.73%
S&P Composite 1500 Information Technology Index (reflects no
deduction for fees, expenses or taxes) 28.99% 22.00% 10.08%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
12
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust Dow Jones Select MicroCap Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the Dow Jones Select
MicroCap Index(SM) (the "Index"). The investment objective of the Fund is a
fundamental policy that may be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.50%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.22%
--------
Total Annual Fund Operating Expenses 0.72%
Fee Waiver and Expense Reimbursement (2) 0.12%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $259 $488 $1,144
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust) has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 70% of the average value of its portfolio.
13
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FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
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PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 80% of its net assets plus the amount of
any borrowings for investment purposes in common stocks of U.S.
micro-capitalization companies which are publicly traded in the United States.
The Fund will normally invest at least 90% of its net assets in common stocks
that comprise the Index. The Fund, using an "indexing" investment approach,
attempts to replicate, before fees and expenses, the performance of the Index.
First Trust seeks a correlation of 0.95 or better (before fees and expenses)
between the Fund's performance and the performance of the Index; a figure of
1.00 would represent perfect correlation.
The Index is developed, maintained and sponsored by S&P Dow Jones Indices LLC
(the "Index Provider"). The Index is comprised of selected U.S.
micro-capitalization companies chosen from all common stocks traded on the New
York Stock Exchange, the NYSE MKT and NASDAQ(R) with limited partnerships
excluded. The Index measures the performance of selected U.S.
micro-capitalization companies chosen from all common stocks traded on the New
York Stock Exchange, the NYSE MKT and NASDAQ(R) (excluding limited partnerships)
that are comparatively liquid and have strong fundamentals relative to the
micro-capitalization segment as a whole. The Index was released for circulation
in June 2005. The composition of the Index is reviewed annually by the Index
Provider in August and additions to or subtractions from the Index occurs
following this annual review. The shares outstanding and float factors are
reconsidered quarterly by the Index Provider in March, June, September and
December, which may impact the relative weightings of the securities in the
Index. Daily historical hypothetical Index values are calculated by the Index
Provider and are available dating back to August 31, 1992. As of March 31, 2014,
the Index consisted of 240 securities and the average and median market
capitalizations of the companies included in the Index were approximately $1,509
million and $106 million, respectively.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
FINANCIAL COMPANIES RISK. Financial companies are especially subject to the
adverse effects of economic recession, currency exchange rates, government
regulation, decreases in the availability of capital, volatile interest rates,
portfolio concentrations in geographic markets and in commercial and residential
real estate loans, and competition from new entrants in their fields of
business.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INDUSTRIALS COMPANIES RISK. The Fund invests in industrials companies.
Industrials companies convert unfinished goods into finished durables used to
manufacture other goods or provide services. Some industrials companies are
involved in electrical equipment and components, industrial products,
manufactured housing and telecommunications equipment. General risks of
industrials companies include the general state of the economy, intense
competition, consolidation, domestic and international politics, excess capacity
and consumer demand and spending trends. In addition, they may also be
significantly affected by overall capital spending levels, economic cycles,
technical obsolescence, delays in modernization, labor relations, government
regulations and e-commerce initiatives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
MICRO-CAP COMPANIES RISK. The Fund invests in micro-capitalization companies.
Such companies may be more vulnerable to adverse general market or economic
developments, may be less liquid, and may experience greater price volatility
than larger, more established companies as a result of several factors,
including limited trading volume, products or financial resources, management
inexperience and less publicly available information. Accordingly, such
companies are generally subject to greater market risk than larger, more
established companies.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
14
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FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
--------------------------------------------------------------------------------
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past eight years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2006 15.69%
2007 -6.02%
2008 -33.33%
2009 20.85%
2010 25.77%
2011 -8.69%
2012 15.86%
2013 43.32%
During the eight-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 21.68% and -25.11%, respectively, for the
quarters ended June 30, 2009 and September 30, 2011. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
15
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FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
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AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(9/27/2005)
Return Before Taxes 43.32% 18.17% 6.88%
Return After Taxes on Distributions 42.73% 17.78% 6.58%
Return After Taxes on Distributions and Sale of Shares 24.48% 14.57% 5.34%
Dow Jones Select MicroCap Index(SM) (reflects no deduction for
fees, expenses or taxes) 44.25% 18.96% 7.63%
Russell 2000(R) Index (reflects no deduction for fees,
expenses or taxes) 38.82% 20.08% 8.59%
MANAGEMENT
Investment Advisor
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2005, with the exception of Stan Ueland,
who has served since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
16
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SUMMARY INFORMATION
FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
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INVESTMENT OBJECTIVE
The First Trust ISE Chindia Index Fund (the "Fund") seeks investment results
that correspond generally to the price and yield (before the Fund's fees and
expenses) of an equity index called the ISE ChIndia Index(TM) (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.26%
--------
Total Annual Fund Operating Expenses 0.66%
Fee Waiver and Expense Reimbursement (2) 0.06%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $248 $463 $1,081
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate may
indicate higher transaction costs and may result in higher taxes when shares are
held in a taxable account. These costs, which are not reflected in annual fund
operating expenses or in the example, affect the Fund's performance. During the
most recent fiscal year, the Fund's portfolio turnover rate was 40% of the
average value of its portfolio.
17
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FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
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PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in securities that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed and owned by the International Securities Exchange, LLC
("ISE"), and is calculated and maintained by S&P Dow Jones Indices LLC. The
Index is a non-market capitalization weighted portfolio of 50 American
Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs") and/or stocks
selected from a universe of all listed ADRs, ADSs and/or stocks of companies
from China and India currently trading on U.S. exchanges. ADRs are certificates
issued by a U.S. bank that represent a bank's holdings of a stated number of
shares of a non-U.S. company. ADSs are vehicles for non-U.S. companies to list
their equity shares on a U.S. exchange and are U.S. dollar denominated, and each
share represents one or more underlying shares in a non-U.S. company. The
inception date of the Index was April 3, 2007. The Index includes the securities
of small and mid cap companies.
With respect to its investment in Chinese companies, the Fund invests in H
shares, depositary receipts and U.S.-listed common stock of companies that are
domiciled in China, including Hong Kong. Some Chinese companies are listed on
both the Hong Kong Stock Exchange with H shares and the Shanghai Stock Exchange
with A shares.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CHINA INVESTMENT RISK. The Fund invests in H shares, depositary receipts and
U.S.-listed common stock of companies that are domiciled in China, including
Hong Kong. Some Chinese companies are listed on both the Hong Kong Stock
Exchange with H shares and the Shanghai Stock Exchange with A shares. Price
differentials between H shares and A shares of the same company may be
significant. Also, price fluctuations of A shares are limited to either 5% or
10% per trading day, while no such limitations exist for H shares. Investing in
securities of companies in China involves additional risks, including, but not
limited to: the economy of China differs, often unfavorably, from the economy in
such respects as structure, general development, government involvement, wealth
distribution, rate of inflation, growth rate, allocation of resources and
capital reinvestment; the central government has historically exercised
substantial control over virtually every sector of the Chinese economy through
administrative regulation and/or state ownership; and actions of the Chinese
central and local government authorities continue to have a substantial effect
on economic conditions in China. Furthermore, China's economy is dependent on
the economies of other Asian countries and can be significantly affected by
currency fluctuations and increasing competition from Asia's other emerging
economies.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
shares into depositary receipts and vice versa. Such restrictions may cause
shares of the underlying issuer to trade at a discount or premium to the market
price of the depositary receipts.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
18
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FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
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INDIA INVESTMENT RISK. The Fund invests in depositary receipts of companies that
are domiciled in India. Investment restrictions in India may limit the ability
to convert shares into depositary receipts and vice versa. These restrictions
may cause shares of the underlying issuer to trade at a premium or discount to
the market price of the depositary receipt. Investing in securities of Indian
companies involves additional risks, including, but not limited to: greater
price volatility; substantially less liquidity and significantly smaller market
capitalization of securities markets; more substantial governmental involvement
in the economy; higher rates of inflation; and greater political, economic and
social uncertainty. Government controls have been reduced on imports and foreign
investment, and privatization of domestic output has proceeded slowly. The rapid
economic growth of the last few years has put heavy stress on India's
infrastructural facilities. Furthermore, although the Indian government is well
aware of the need for reform and is pushing ahead in this area, businesses still
have to deal with an inefficient and sometimes slow-moving bureaucracy.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
NON-U.S. SECURITIES AND EMERGING MARKETS RISK. The Fund holds non-U.S.
securities that are either directly listed on a U.S. securities exchange or in
the form of depositary receipts. Non-U.S. securities are subject to higher
volatility than securities of domestic issuers due to possible adverse
political, social or economic developments; restrictions on foreign investment
or exchange of securities; lack of liquidity; excessive taxation; government
seizure of assets; different legal or accounting standards; and less government
supervision and regulation of exchanges in foreign countries. These risks may be
heightened for securities of companies located in, or with significant
operations in, emerging market countries.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past six years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and a specialized securities market index. See "Total Return
19
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FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
--------------------------------------------------------------------------------
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST ISE CHINDIA INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2008 -56.98%
2009 81.58%
2010 18.46%
2011 -26.02%
2012 17.11%
2013 35.81%
During the six-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 47.58% and -26.65%, respectively, for the
quarters ended June 30, 2009 and March 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(5/8/2007)
Return Before Taxes 35.81% 20.41% 6.40%
Return After Taxes on Distributions 35.27% 19.93% 6.01%
Return After Taxes on Distributions and Sale of Shares 20.21% 16.46% 4.86%
ISE ChIndia Index(TM) (reflects no deduction for fees,
expenses or taxes) 36.41% 21.03% 6.98%
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 5.73%
MSCI Emerging Markets Index (reflects no deduction for fees,
expenses or taxes) -2.60% 14.79% 2.56%
20
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FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
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MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
21
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SUMMARY INFORMATION
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust ISE-Revere Natural Gas Index Fund (the "Fund") seeks investment
results that correspond generally to the price and yield (before the Fund's fees
and expenses) of an equity index called the ISE-REVERE Natural Gas Index(TM)
(the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.20%
--------
Total Annual Fund Operating Expenses 0.60%
Fee Waiver and Expense Reimbursement (2) 0.00%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $238 $438 $1,018
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 49% of the average value of its portfolio.
22
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FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed and owned by the International Securities Exchange, LLC
("ISE"), and is calculated and maintained by S&P Dow Jones Indices LLC. The
Index is designed to objectively identify and select those stocks from the
universe of stocks of companies that are involved in the exploration and
production of natural gas, screened by stock performance variables as well as
statistical factors to optimize both Index performance and the Fund's
correlation to the price of natural gas, which helps the Index's correlation to
the price of natural gas. The Index is an equal-weighted index comprised of
exchange-listed companies that derive a substantial portion of their revenues
from the exploration and production of natural gas. The inception date of the
Index was October 4, 2006. As of March 31, 2014, there were 28 securities that
comprised the Index. The Index includes the securities of small and mid cap
companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
shares into depositary receipts and vice versa. Such restrictions may cause
shares of the underlying issuer to trade at a discount or premium to the market
price of the depositary receipts.
ENERGY COMPANIES RISK. The Fund invests in the securities of energy companies,
which include integrated oil companies that are involved in the exploration,
production and refining process, gas distributors and pipeline-related companies
and other energy companies involved with mining, producing and delivering
energy-related services and drilling. General problems of energy companies
include volatile fluctuations in price and supply of energy fuels, international
politics, terrorist attacks, reduced demand, the success of exploration
projects, clean-up and litigation costs relating to oil spills and environmental
damage, and tax and other regulatory policies of various governments. Natural
disasters such as hurricanes in the Gulf of Mexico also impact the petroleum
industry. Oil production and refining companies are subject to extensive
federal, state and local environmental laws and regulations regarding air
emissions and the disposal of hazardous materials. In addition, oil prices are
generally subject to extreme volatility.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NATURAL GAS COMPANIES RISK. One of natural gas companies' primary risks is the
competitive risk associated with the prices of alternative fuels, such as coal
and oil. For example, major natural gas customers such as industrial users and
electric power generators often have the ability to switch between the use of
coal, oil or natural gas. During periods when competing fuels are less
expensive, the revenues of gas utility companies may decline with a
corresponding impact on earnings. After years of booming production, natural gas
firms have recently begun scaling back after record low prices and huge
surpluses. Weather is another risk that may affect natural gas companies. Recent
overproduction and a mild winter have contributed to a scaled back demand for
natural gas in the United States and declining stock prices for natural gas
companies. Additionally, natural gas companies are sensitive to increased
interest rates because of the capital intensive nature of their business.
23
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FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
--------------------------------------------------------------------------------
Furthermore, there are additional risks and hazards that are inherent to natural
gas companies that may cause the price of natural gas to widely fluctuate. The
exploration for, and production of, natural gas is an uncertain process with
many risks. The cost of drilling, completing and operating wells for natural gas
is often uncertain, and a number of factors can delay or prevent drilling
operations or production, including:
o unexpected drilling conditions;
o pressure or irregularities in formations;
o equipment failures or repairs;
o fires or other accidents;
o adverse weather conditions;
o pipeline ruptures or spills; and
o shortages or delays in the availability of drilling rigs and the delivery
of equipment.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-U.S. SECURITIES AND EMERGING MARKETS RISK. The Fund holds non-U.S.
securities that are either directly listed on a U.S. securities exchange or in
the form of depositary receipts. Non-U.S. securities are subject to higher
volatility than securities of domestic issuers due to possible adverse
political, social or economic developments; restrictions on foreign investment
or exchange of securities; lack of liquidity; excessive taxation; government
seizure of assets; different legal or accounting standards; and less government
supervision and regulation of exchanges in foreign countries. These risks may be
heightened for securities of companies located in, or with significant
operations in, emerging market countries.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past six years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and a specialized securities market index. See "Total Return
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
24
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FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
--------------------------------------------------------------------------------
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2008 -46.57%
2009 49.21%
2010 12.22%
2011 -6.85%
2012 -13.51%
2013 25.13%
During the six-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 34.52% and -40.35%, respectively, for the
quarters ended June 30, 2008 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(5/8/2007)
Return Before Taxes 25.13% 11.04% 0.11%
Return After Taxes on Distributions 24.91% 10.88% -0.06%
Return After Taxes on Distributions and Sale of Shares 14.21% 8.72% 0.01%
ISE-REVERE Natural Gas Index(TM) (reflects no deduction for
fees, expenses or taxes) 25.73% 11.85% 0.78%
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 5.73%
S&P Composite 1500 Energy Index (reflects no deduction for
fees, expenses or taxes) 25.39% 13.95% 6.29%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
25
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FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
--------------------------------------------------------------------------------
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
26
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SUMMARY INFORMATION
FIRST TRUST ISE WATER INDEX FUND (FIW)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust ISE Water Index Fund (the "Fund") seeks investment results that
correspond generally to the price and yield (before the Fund's fees and
expenses) of an equity index called the ISE Water Index(TM) (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.20%
--------
Total Annual Fund Operating Expenses 0.60%
Fee Waiver and Expense Reimbursement (2) 0.00%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $238 $438 $1,018
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 45% of the average value of its portfolio.
27
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FIRST TRUST ISE WATER INDEX FUND (FIW)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed and owned by the International Securities Exchange, LLC
("ISE"), and is calculated and maintained by S&P Dow Jones Indices LLC. The
Index is a modified market-capitalization weighted portfolio of 36 stocks of
companies as of March 31, 2014 that derive a substantial portion of their
revenues from the potable and wastewater industries, which are generally
industrial and utilities companies. The components of the Index are adjusted so
that the weights conform to the following schedule:
o Assign weights of 4.0% to stocks 1-10;
o Assign weights of 3.5% to stocks 11-15;
o Assign weights of 3.0% to stocks 16-20;
o Assign weights of 2.0% to stocks 21-30; and
o Equally distribute weights among remaining stocks.
The inception date of the Index was November 20, 2006. The Fund holds non-U.S.
securities that are either directly listed on a U.S. securities exchange or in
the form of depositary receipts. The Fund may also invest in securities of
companies located in, or with significant operations in, emerging market
countries. The Index includes the securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
shares into depositary receipts and vice versa. Such restrictions may cause
shares of the underlying issuer to trade at a discount or premium to the market
price of the depositary receipts.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INDUSTRIALS COMPANIES RISK. The Fund invests in industrials companies.
Industrials companies convert unfinished goods into finished durables used to
manufacture other goods or provide services. Some industrials companies are
involved in electrical equipment and components, industrial products,
manufactured housing and telecommunications equipment. General risks of
industrials companies include the general state of the economy, intense
competition, consolidation, domestic and international politics, excess capacity
and consumer demand and spending trends. In addition, they may also be
significantly affected by overall capital spending levels, economic cycles,
technical obsolescence, delays in modernization, labor relations, government
regulations and e-commerce initiatives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
28
--------------------------------------------------------------------------------
FIRST TRUST ISE WATER INDEX FUND (FIW)
--------------------------------------------------------------------------------
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-U.S. SECURITIES AND EMERGING MARKETS RISK. The Fund holds non-U.S.
securities that are either directly listed on a U.S. securities exchange or in
the form of depositary receipts. Non-U.S. securities are subject to higher
volatility than securities of domestic issuers due to possible adverse
political, social or economic developments; restrictions on foreign investment
or exchange of securities; lack of liquidity; excessive taxation; government
seizure of assets; different legal or accounting standards; and less government
supervision and regulation of exchanges in foreign countries. These risks may be
heightened for securities of companies located in, or with significant
operations in, emerging market countries.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
UTILITIES COMPANIES RISK. The Fund invests in the securities of utilities
companies. General problems of utilities companies include the imposition of
rate caps, increased competition due to deregulation, the difficulty in
obtaining an adequate return on invested capital or in financing large
construction projects, the limitations on operations and increased costs and
delays attributable to environmental considerations, and the capital market's
ability to absorb utility debt. In addition, taxes, government regulation,
international politics, price and supply fluctuations, volatile interest rates
and energy conservation may cause difficulties for utilities. All of such
issuers have been experiencing certain of these problems in varying degrees.
WATER COMPANIES RISK. Adverse developments in the potable water and wastewater
business may significantly affect the value of the shares of the Fund. Companies
involved in the potable water and wastewater business are subject to
environmental considerations, taxes, government regulation, price and supply
fluctuations, competition and conservation.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past six years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
29
--------------------------------------------------------------------------------
FIRST TRUST ISE WATER INDEX FUND (FIW)
--------------------------------------------------------------------------------
FIRST TRUST ISE WATER INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2008 -29.40%
2009 20.29%
2010 19.49%
2011 -5.62%
2012 26.83%
2013 30.91%
During the six-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 18.52% and -20.91%, respectively, for the
quarters ended June 30, 2009 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(5/8/2007)
Return Before Taxes 30.91% 17.63% 9.09%
Return After Taxes on Distributions 30.50% 17.25% 8.77%
Return After Taxes on Distributions and Sale of Shares 17.46% 14.12% 7.11%
ISE Water Index(TM) (reflects no deduction for fees,
expenses or taxes) 31.90% 18.50% 9.84%
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 5.73%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
30
--------------------------------------------------------------------------------
FIRST TRUST ISE WATER INDEX FUND (FIW)
--------------------------------------------------------------------------------
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
31
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust Morningstar Dividend Leaders Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the Morningstar(R) Dividend
Leaders Index(SM) (the "Index"). The investment objective of the Fund is a
fundamental policy that may be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.30%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.19%
--------
Total Annual Fund Operating Expenses 0.49%
Fee Waiver and Expense Reimbursement (2) 0.04%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.45%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.45% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$46 $197 $373 $882
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.45% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.45% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 35% of the average value of its portfolio.
32
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by Morningstar, Inc.
("Morningstar"). The inception date of the Index was June 30, 1997. The
objective of the Index is to offer investors a benchmark for dividend portfolios
as well as a means to invest in a portfolio of stocks that have a consistent
record of growing dividends as well as the ability to sustain them. At the
annual rebalance date each June, the Index consists of the top 100 stocks, based
on dividend yield, of the securities listed on one of the three major exchanges
(the New York Stock Exchange, the NYSE MKT or NASDAQ(R)) that have been selected
through the application of Morningstar's proprietary multi-step screening
process. As of March 31, 2014, the Index was comprised of 99 component
securities.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
HEALTH CARE COMPANIES RISK. The Fund invests in the securities of health care
companies, which are companies involved in medical services or health care,
including biotechnology research and production, drugs and pharmaceuticals and
health care facilities and services. These companies are subject to extensive
competition, generic drug sales or the loss of patent protection, product
liability litigation and increased government regulation. Research and
development costs of bringing new drugs to market are substantial, and there is
no guarantee that the product will ever come to market. Health care facility
operators may be affected by the demand for services, efforts by government or
insurers to limit rates, restriction of government financial assistance and
competition from other providers.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
TELECOMMUNICATIONS COMPANIES RISK. The Fund invests in the securities of
telecommunications companies. Telecommunications companies are subject to a
market characterized by increasing competition and regulation by the Federal
33
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
--------------------------------------------------------------------------------
Communications Commission and various state regulatory authorities, the need to
commit substantial capital to meet increasing competition, particularly in
formulating new products and services using new technology, and technological
innovations that may make various products and services obsolete.
UTILITIES COMPANIES RISK. The Fund invests in the securities of utilities
companies. General problems of utilities companies include the imposition of
rate caps, increased competition due to deregulation, the difficulty in
obtaining an adequate return on invested capital or in financing large
construction projects, the limitations on operations and increased costs and
delays attributable to environmental considerations and the capital market's
ability to absorb utility debt. In addition, taxes, government regulation,
international politics, price and supply fluctuations, volatile interest rates
and energy conservation may cause difficulties for utilities. All of such
issuers have been experiencing certain of these problems in varying degrees.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 -10.64%
2008 -31.71%
2009 14.24%
2010 16.05%
2011 14.44%
2012 9.14%
2013 22.71%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 26.37% and -25.26%, respectively, for the
quarters ended June 30, 2009 and March 31, 2009. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
34
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(3/9/2006)
Return Before Taxes 22.71% 15.23% 5.30%
Return After Taxes on Distributions 21.00% 13.63% 3.81%
Return After Taxes on Distributions and Sale of Shares 12.81% 11.45% 3.46%
Morningstar(R) Dividend Leaders Index(SM) (reflects no
deduction for fees, expenses or taxes) 23.36% 15.84% 5.83%
S&P 500(R) Index (reflects no deduction for fees,
expenses or taxes) 32.39% 17.94% 7.16%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
35
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust NASDAQ-100 Equal Weighted Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the NASDAQ-100 Equal
Weighted Index(SM) (the "Index"). The investment objective of the Fund is a
fundamental policy that may be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.23%
--------
Total Annual Fund Operating Expenses 0.63%
Fee Waiver and Expense Reimbursement (2) 0.03%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $243 $451 $1,050
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 38% of the average value of its portfolio.
36
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by The NASDAQ OMX Group, Inc.
The NASDAQ-100 Equal Weighted Index(SM) is the equal-weighted version of the
NASDAQ-100 Index(R) which includes 100 of the largest non-financial securities
listed on NASDAQ(R) based on market capitalization. The Index contains the same
securities as the NASDAQ-100 Index(R) but each of the securities is initially
set at a weight of 1.00% of the Index which is rebalanced quarterly. The
inception date of the Index was June 20, 2005. The Index includes the securities
of mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in mid capitalization companies. Such
companies may be more vulnerable to adverse general market or economic
developments, and their securities may be less liquid and may experience greater
price volatility than those of larger, more established companies as a result of
several factors, including limited trading volumes, products or financial
37
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
--------------------------------------------------------------------------------
resources, management inexperience and less publicly available information.
Accordingly, such companies are generally subject to greater market risk than
larger, more established companies.
TECHNOLOGY COMPANIES RISK. The Fund invests in technology companies. Technology
companies are generally subject to the risks of rapidly changing technologies,
short product life cycles, fierce competition, aggressive pricing and reduced
profit margins, loss of patent, copyright and trademark protections, cyclical
market patterns, evolving industry standards, and frequent new product
introductions. Technology companies may be smaller and less experienced
companies, with limited product lines, markets or financial resources and fewer
experienced management or marketing personnel. Technology company stocks,
particularly those involved with the Internet, have experienced extreme price
and volume fluctuations that often have been unrelated to their operating
performance.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and a specialized securities market index. See "Total Return
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 9.74%
2008 -43.96%
2009 59.54%
2010 21.25%
2011 -2.77%
2012 14.86%
2013 39.95%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 21.82% and -27.75%, respectively, for the
quarters ended June 30, 2009 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
38
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(4/19/2006)
Return Before Taxes 39.95% 24.76% 8.47%
Return After Taxes on Distributions 39.64% 24.50% 8.32%
Return After Taxes on Distributions and Sale of Shares 22.59% 20.36% 6.75%
NASDAQ-100 Equal Weighted Index(SM) (reflects no deduction
for fees, expenses or taxes) 40.99% 25.56% 9.15%
S&P 500(R) Index (reflects no deduction for fees, expenses
or taxes) 32.39% 17.94% 6.84%
NASDAQ-100 Index(R) (reflects no deduction for fees,
expenses or taxes) 36.94% 25.56% 10.85%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NASDAQ(R) through a broker-dealer. Shares of the
Fund trade on NASDAQ(R) at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
39
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust NASDAQ-100 Ex-Technology Sector Index Fund (the "Fund")
seeks investment results that correspond generally to the price and yield
(before the Fund's fees and expenses) of an equity index called the NASDAQ-100
Ex-Tech Sector Index(SM) (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.27%
--------
Total Annual Fund Operating Expenses 0.67%
Fee Waiver and Expense Reimbursement (2) 0.07%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $250 $467 $1,092
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 33% of the average value of its portfolio.
40
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by The NASDAQ OMX Group, Inc.
The Index is an equal-weighted index based on the securities of the NASDAQ-100
Index(R) that are not classified as "technology" according to the Industry
Classification Benchmark ("ICB") classification system and, as a result, is a
subset of the NASDAQ-100 Index(R). The NASDAQ-100 Index(R) includes 100 of the
largest domestic and international non-financial companies listed on NASDAQ(R)
based on market capitalization. The inception date of the Index was February 22,
2006 and the inception date of the NASDAQ-100 Index(R) was January 31, 1985. As
of March 31, 2014, the Index was comprised of 60 component securities. The Index
includes the securities of mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
HEALTH CARE COMPANIES RISK. The Fund invests in the securities of health care
companies, which are companies involved in medical services or health care,
including biotechnology research and production, drugs and pharmaceuticals and
health care facilities and services. These companies are subject to extensive
competition, generic drug sales or the loss of patent protection, product
liability litigation and increased government regulation. Research and
development costs of bringing new drugs to market are substantial, and there is
no guarantee that the product will ever come to market. Health care facility
operators may be affected by the demand for services, efforts by government or
insurers to limit rates, restriction of government financial assistance and
competition from other providers.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
41
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
--------------------------------------------------------------------------------
SMALLER COMPANIES RISK. The Fund invests in mid capitalization companies. Such
companies may be more vulnerable to adverse general market or economic
developments, and their securities may be less liquid and may experience greater
price volatility than those of larger, more established companies as a result of
several factors, including limited trading volumes, products or financial
resources, management inexperience and less publicly available information.
Accordingly, such companies are generally subject to greater market risk than
larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past six years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2008 -43.09%
2009 46.74%
2010 20.64%
2011 -1.08%
2012 20.31%
2013 41.24%
During the six-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 21.76% and -27.41%, respectively, for the
quarters ended September 30, 2009 and December 31, 2008. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(2/8/2007)
Return Before Taxes 41.24% 24.37% 8.85%
Return After Taxes on Distributions 41.06% 24.10% 8.67%
Return After Taxes on Distributions and Sale of Shares 23.33% 20.01% 7.01%
NASDAQ-100 Ex-Tech Sector Index(SM) (reflects no deduction
for fees, expenses or taxes) 42.30% 25.16% 9.54%
Russell 1000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.11% 18.59% 6.11%
42
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
--------------------------------------------------------------------------------
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NASDAQ(R) through a broker-dealer. Shares of the
Fund trade on NASDAQ(R) at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
43
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust NASDAQ-100-Technology Sector Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the NASDAQ-100 Technology
Sector Index(SM) (the "Index"). The investment objective of the Fund is a
fundamental policy that may be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.22%
--------
Total Annual Fund Operating Expenses 0.62%
Fee Waiver and Expense Reimbursement (2) 0.02%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $241 $447 $1,039
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 33% of the average value of its portfolio.
44
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by The NASDAQ OMX Group, Inc.
The Index is an equal-weighted index based on the securities of the NASDAQ-100
Index(R) that are classified as "technology" according to the Industry
Classification Benchmark classification system. The NASDAQ-100 Index(R) includes
100 of the largest domestic and international non-financial companies listed on
NASDAQ(R) based on market capitalization. The inception date of the Index was
February 22, 2006 and the inception date of the NASDAQ-100 Index(R) was January
1, 1985. On March 31, 2014, there were 40 securities that comprised the Index.
The Index includes the securities of mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SEMICONDUCTOR COMPANIES RISK. The Fund invests in companies primarily involved
in the design, distribution, manufacture and sale of semiconductors.
Semiconductor companies are significantly affected by rapid obsolescence,
intense competition and global demand. The Fund is also subject to the risk that
the securities of such issuers will underperform the market as a whole due to
legislative or regulatory changes. The prices of the securities of semiconductor
companies may fluctuate widely in response to such events.
SMALLER COMPANIES RISK. The Fund invests in mid capitalization companies. Such
companies may be more vulnerable to adverse general market or economic
developments, and their securities may be less liquid and may experience greater
price volatility than those of larger, more established companies as a result of
several factors, including limited trading volumes, products or financial
45
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
--------------------------------------------------------------------------------
resources, management inexperience and less publicly available information.
Accordingly, such companies are generally subject to greater market risk than
larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and a specialized securities market index. See "Total Return
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 7.66%
2008 -45.26%
2009 79.89%
2010 21.92%
2011 -5.75%
2012 8.02%
2013 38.12%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 22.52% and -27.70%, respectively, for the
quarters ended June 30, 2009 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(4/19/2006)
Return Before Taxes 38.12% 25.26% 8.05%
Return After Taxes on Distributions 37.64% 25.03% 7.92%
Return After Taxes on Distributions and Sale of Shares 21.55% 20.82% 6.40%
NASDAQ-100 Technology Sector Index(SM) (reflects no
deduction for fees, expenses or taxes) 39.01% 26.07% 8.73%
S&P 500(R) Index (reflects no deduction for fees,
expenses or taxes) 32.39% 17.94% 6.84%
S&P 500 Information Technology Index (reflects no
deduction for fees, expenses or taxes) 28.43% 21.90% 8.18%
46
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
--------------------------------------------------------------------------------
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NASDAQ(R) through a broker-dealer. Shares of the
Fund trade on NASDAQ(R) at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
47
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust NASDAQ(R) ABA Community Bank Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the NASDAQ OMX(R) ABA
Community Bank Index(SM) (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.36%
--------
Total Annual Fund Operating Expenses 0.76%
Fee Waiver and Expense Reimbursement (2) 0.16%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $267 $504 $1,186
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal period, the Fund's portfolio
turnover rate was 29% of the average value of its portfolio.
48
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is jointly owned and was developed by The NASDAQ OMX Group, Inc. (the
"Index Provider") and American Bankers Association (the "ABA"). The Index is
calculated and maintained by the Index Provider.
For the purposes of the Index, a "community bank" is considered to be all U.S.
banks and thrifts or their holding companies listed on NASDAQ(R), excluding the
50 largest U.S. banks by asset size. Also excluded are banks that have an
international specialization and those banks that have a credit-card
specialization, as screened by the ABA based on the most recent data from the
Federal Deposit Insurance Corporation (the "FDIC"). Banks with an international
specialization are those institutions with assets greater than $10 billion and
more than 25% of total assets in foreign offices. Banks with a credit-card
specialization are those institutions with credit-card loans plus securitized
receivables in excess of 50% of total assets plus securitized receivables.
Securities in the Index have a market capitalization of at least $200 million
and as of March 31, 2014, there were 135 securities that comprised the Index.
The Index includes the securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the FDIC or any other
governmental agency. There can be no assurance that the Fund's investment
objective will be achieved.
COMMUNITY BANK RISK. The Fund invests in the securities of community banks. Such
companies were significantly impacted by the downturn in the United States and
world economies that began with the decline in the subprime mortgage lending
market in the United States. These conditions have brought about legislative and
regulatory changes, changes in short-term and long-term interest rates,
inflation and changes in government monetary and fiscal policies, all of which
have had a significant impact on the banking business.
Unlike larger national or other regional banks that are more geographically
diversified, a community bank's financial performance may be highly dependent
upon the business environment in certain geographic regions of the United States
and may be adversely impacted by any downturn or unfavorable economic or
employment developments in its local market and the United States as a whole. In
particular, this environment impacts the ability of borrowers to pay interest on
and repay principal of outstanding loans and the value of collateral securing
those loans.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
49
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FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
--------------------------------------------------------------------------------
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past four years as well as the average
annual Fund and Index returns for the one year and since inception periods ended
December 31, 2013. The bar chart and table provide an indication of the risks of
investing in the Fund by showing changes in the Fund's performance from
year-to-year and by showing how the Fund's average annual total returns based on
net asset value compare to those of the Index, a broad-based market index and a
specialized index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2010 12.77%
2011 -6.48%
2012 13.52%
2013 42.89%
During the four-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 20.66% and -21.25%, respectively, for the
quarters ended December 31, 2011 and September 30, 2011. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
50
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FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Download Table]
1 Year Since Inception
(6/29/2009)
Returns Before Taxes 42.89% 15.70%
After Taxes on Distributions 42.19% 15.08%
After Taxes on Distributions and Sale of Shares 24.23% 12.28%
NASDAQ OMX(R) ABA Community Bank Index(SM) (reflects no
deduction for fees, expenses or taxes) 43.83% 16.46%
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 19.66%
S&P Composite 1500 Financials Sector Index (reflects no
deduction for fees, expenses or taxes) 34.25% 16.47%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2009.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NASDAQ(R) through a broker-dealer. Shares of the
Fund trade on NASDAQ(R) at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
51
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund (the "Fund")
seeks investment results that correspond generally to the price and yield
(before the Fund's fees and expenses) of an equity index called the NASDAQ(R)
Clean Edge(R) Green Energy Index(SM) (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.30%
--------
Total Annual Fund Operating Expenses 0.70%
Fee Waiver and Expense Reimbursement (2) 0.10%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $256 $479 $1,123
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate may
indicate higher transaction costs and may result in higher taxes when shares are
held in a taxable account. These costs, which are not reflected in annual fund
operating expenses or in the example, affect the Fund's performance. During the
most recent fiscal year, the Fund's portfolio turnover rate was 49% of the
average value of its portfolio.
52
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FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by The NASDAQ OMX Group, Inc.
(the "Index Provider") and Clean Edge, Inc. The Index is a modified market
capitalization-weighted index in which larger companies receive a larger Index
weighting and includes caps to prevent high concentrations among larger
alternative energy stocks. The Index is an equity index designed to track the
performance of clean-energy companies that are publicly traded in the United
States and includes companies engaged in manufacturing, development,
distribution and installation of emerging clean-energy technologies including,
but not limited to, solar photovoltaics, biofuels and advanced batteries.
The Index is reconstituted semi-annually in March and September and rebalanced
quarterly. The inception date of the Index was November 17, 2006. The number of
holdings in the Index may vary, but as of March 31, 2014, the Index was
comprised of 50 component securities. The Index includes the securities of small
and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CLEAN ENERGY COMPANIES RISK. The Fund invests in renewable and alternative
energy companies. Renewable and alternative energy companies can be
significantly affected by the following factors: obsolescence of existing
technology, short product cycles, legislation resulting in more strict
government regulations and enforcement policies, fluctuations in energy prices
and supply and demand of alternative energy fuels, energy conservation, the
success of exploration projects, the supply of and demand for oil and gas, world
events and economic conditions. In addition, shares of clean energy companies
have been significantly more volatile than shares of companies operating in
other more established industries and the securities included in the Fund may be
subject to sharp price declines. This industry is relatively nascent and
under-researched in comparison to more established and mature sectors, and
should therefore be regarded as having greater investment risk.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INDUSTRIALS COMPANIES RISK. The Fund invests in industrials companies.
Industrials companies convert unfinished goods into finished durables used to
manufacture other goods or provide services. Some industrials companies are
involved in electrical -equipment and -components, industrial products,
manufactured housing and tele-com-munications equipment. General risks of
industrials companies include the general state of the economy, intense
competition, consolidation, domestic and international politics, excess capacity
and consumer demand and spending trends. In addition, they may also be
significantly affected by overall capital spending levels, economic cycles,
technical obsolescence, delays in modernization, labor relations, government
-regulations and e-commerce initiatives.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
53
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
--------------------------------------------------------------------------------
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
TECHNOLOGY COMPANIES RISK. The Fund invests in technology companies. Technology
companies are generally subject to the risks of rapidly changing technologies,
short product life cycles, fierce competition, aggressive pricing and reduced
profit margins, loss of patent, copyright and trademark protections, cyclical
market patterns, evolving industry standards, and frequent new product
introductions. Technology companies may be smaller and less experienced
companies, with limited product lines, markets or financial resources and fewer
experienced management or marketing personnel. Technology company stocks,
particularly those involved with the Internet, have experienced extreme price
and volume fluctuations that often have been unrelated to their operating
performance.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past six years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
54
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2008 -63.74%
2009 43.79%
2010 2.05%
2011 -41.23%
2012 -0.50%
2013 89.79%
During the six-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 30.69% and -40.98%, respectively, for the
quarters ended June 30, 2009 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(2/8/2007)
Return Before Taxes 89.79% 10.25% -1.34%
Return After Taxes on Distributions 89.37% 10.10% -1.44%
Return After Taxes on Distributions and Sale of Shares 50.77% 8.05% -1.06%
NASDAQ(R) Clean Edge(R) Green Energy Index(SM) (reflects
no deduction for fees, expenses or taxes) 89.34% 10.45% -1.00%
Russell 2000(R) Index (reflects no deduction for fees,
expenses or taxes) 38.82% 20.08% 6.75%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NASDAQ(R) through a broker-dealer. Shares of the
Fund trade on NASDAQ(R) at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
55
--------------------------------------------------------------------------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
--------------------------------------------------------------------------------
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
56
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust NYSE Arca Biotechnology Index Fund (the "Fund") seeks investment
results that correspond generally to the price and yield (before the Fund's fees
and expenses) of an equity index called the NYSE Arca Biotechnology Index(SM)
(the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.20%
--------
Total Annual Fund Operating Expenses 0.60%
Fee Waiver and Expense Reimbursement (2) 0.00%
--------
Total Net Annual Fund Operating Expenses After Fee
Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $238 $438 $1,018
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 48% of the average value of its portfolio.
57
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FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
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PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by NYSE Arca. The Index is an
equal-dollar weighted index designed to measure the performance of a cross
section of companies in the biotechnology industry that are primarily involved
in the use of biological processes to develop products or provide services. Such
processes include, but are not limited to, recombinant DNA technology, molecular
biology, genetic engineering, monoclonal antibody-based technology,
lipid/liposome technology, and genomics. The Index was established with a
benchmark value of 200.00 on October 18, 1991. Real-time publication of the
Index began on April 1, 1992. The Index is rebalanced quarterly based on closing
prices on the third Friday in January, April, July and October to ensure that
each component stock continues to represent approximately equal weight in the
Index. The companies that comprise the Index trade on various exchanges. As of
March 31, 2014, the Index was composed of 20 companies. The Index includes the
securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
BIOTECHNOLOGY/PHARMACEUTICAL COMPANIES RISK. Biotechnology and pharmaceutical
companies are subject to changing government regulation which could have a
negative effect on the price, profitability and availability of their products
and services. Regulations have been proposed to increase the availability and
affordability of prescription drugs including proposals to increase access to
generic drugs and to increase the rebates paid by drug manufacturers in exchange
for Medicaid coverage of their products. Whether such proposals will be adopted
cannot be predicted. In addition, such companies face increasing competition
from existing generic drugs, the termination of their patent protection for
certain drugs and technological advances which render their products or services
obsolete. The research and development costs required to bring a drug to market
are substantial and may include a lengthy review by the government, with no
guarantee that the product will ever be brought to market or show a profit. In
addition, the potential for an increased amount of required disclosure of
proprietary scientific information could negatively impact the competitive
position of these companies. Many of these companies may not offer certain drugs
or products for several years, and as a result, may have significant losses of
revenue and earnings.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
HEALTH CARE COMPANIES RISK. The Fund invests in the securities of health care
companies, which are companies involved in medical services or health care,
including biotechnology research and production, drugs and pharmaceuticals and
health care facilities and services. These companies are subject to extensive
competition, generic drug sales or the loss of patent protection, product
liability litigation and increased government regulation. Research and
development costs of bringing new drugs to market are substantial, and there is
no guarantee that the product will ever come to market. Health care facility
operators may be affected by the demand for services, efforts by government or
insurers to limit rates, restriction of government financial assistance and
competition from other providers.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
58
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FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
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NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and two specialized securities market indices. See "Total Return
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 3.65%
2008 -18.33%
2009 44.87%
2010 36.90%
2011 -16.36%
2012 40.91%
2013 50.10%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 32.14% and -24.61%, respectively, for the
quarters ended September 30, 2009 and September 30, 2011. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
59
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FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
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AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(6/19/2006)
Return Before Taxes 50.10% 28.54% 18.08%
Return After Taxes on Distributions 50.10% 28.54% 18.01%
Return After Taxes on Distributions and Sale of Shares 28.36% 23.83% 15.15%
NYSE Arca Biotechnology Index(SM) (reflects no deduction
for fees, expenses or taxes) 50.80% 29.27% 18.79%
NASDAQ(R) Biotechnology Index (reflects no deduction for
fees, expenses or taxes) 66.02% 27.07% 17.54%
S&P 500(R) Index (reflects no deduction for fees, expenses
or taxes) 32.39% 17.94% 7.73%
S&P Composite 1500 Health Care Index (reflects no deduction
for fees, expenses or taxes) 42.19% 19.06% 11.07%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
60
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SUMMARY INFORMATION
FIRST TRUST S&P REIT INDEX FUND (FRI)
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INVESTMENT OBJECTIVE
The First Trust S&P REIT Index Fund (the "Fund") seeks investment results that
correspond generally to the price and yield (before the Fund's fees and
expenses) of an equity index called the S&P United States REIT Index (the
"Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.30%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.20%
--------
Total Annual Fund Operating Expenses 0.50%
Fee Waiver and Expense Reimbursement (2) 0.00%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.50%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.50% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$51 $206 $384 $899
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.50% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.50% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 11% of the average value of its portfolio.
61
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FIRST TRUST S&P REIT INDEX FUND (FRI)
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PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by S&P Dow Jones Indices LLC.
Generally, real estate investment trusts ("REITs") are companies that own and
most often actively manage income-generating commercial real estate. Some REITs
make or invest in loans and other obligations that are secured by real estate
collateral.
The Index is a subset of the S&P Developed REIT Index, which measures the
performance of more than 200 REITs or REIT-like structures in 15 developed
markets. The S&P Developed REIT Index is a sub-index of the S&P Global REIT
Index. The S&P Global REIT Index contains more than 264 constituents from more
than 15 countries and serves as the universe from which constituents of other
property indices may be drawn.
The S&P Developed REIT Index aims to represent an accurate measure of the REIT
developed equity market, reflecting the risk and return characteristics of this
broad universe on an on-going basis. The Index contains those constituents of
the S&P Developed REIT Index that are domiciled in the United States. As of
March 31, 2014, the Index is comprised of 142 companies. The Index includes the
securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INTEREST RATE RISK. Increases in interest rates typically lower the present
value of a REIT's future earnings stream, and may make financing property
purchases and improvements more costly. Because the market price of REIT stocks
may change based upon investors' collective perceptions of future earnings, the
value of the Fund will generally decline when investors anticipate or experience
rising interest rates.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REAL ESTATE INVESTMENT RISK. The Fund invests in companies in the real estate
industry, including REITs. Therefore, the Fund is subject to the risks
associated with investing in real estate, which may include, but are not limited
to, fluctuations in the value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local economic conditions;
decreases in market rates for rents; increases in competition, property taxes,
capital expenditures or operating expenses; and other economic, political or
regulatory occurrences affecting companies in the real estate industry.
REIT INVESTMENT RISK. In addition to risks related to investments in real estate
generally, investing in REITs involves certain other risks related to their
structure and focus, which include, but are not limited to, dependency upon
management skills, limited diversification, the risks of locating and managing
financing for projects, heavy cash flow dependency, possible default by
borrowers, the costs and potential losses of self-liquidation of one or more
holdings, the risk of a possible lack of mortgage funds and associated interest
rate risks, overbuilding, property vacancies, increases in property taxes and
operating expenses, changes in zoning laws, losses due to environmental damages,
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FIRST TRUST S&P REIT INDEX FUND (FRI)
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changes in neighborhood values and appeal to purchases, the possibility of
failing to maintain exemptions from registration under the 1940 Act and, in many
cases, relatively small market capitalization, which may result in less market
liquidity and greater price volatility.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past six years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index, a broad-based
market index and a specialized securities market index. On November 6, 2008, the
Fund's underlying index changed from the S&P REIT Composite Index to the S&P
United States REIT Index. Therefore, the Fund's performance and historical
returns shown for the periods prior to November 6, 2008 are not necessarily
indicative of the performance that the Fund, based on the Index, would have
generated. The inception date of the Index was June 30, 2008. Returns for the
Index are only disclosed for those periods in which the Index was in existence
for the whole period. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST S&P REIT INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2008 -38.87%
2009 28.00%
2010 27.73%
2011 7.90%
2012 17.39%
2013 1.82%
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During the six-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 34.45% and -39.18%, respectively, for the
quarters ended September 30, 2009 and December 31, 2008. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(5/8/2007)
Return Before Taxes 1.82% 16.09% 0.64%
Return After Taxes on Distributions 0.51% 15.02% -0.31%
Return After Taxes on Distributions and Sale of Shares 1.04% 12.51% 0.07%
S&P United States REIT Index* (reflects no deduction for
fees, expenses or taxes) 2.40% 16.71% N/A
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 5.73%
FTSE EPRA/NAREIT North America Index (reflects no deduction
for fees, expenses or taxes) 1.27% 17.10% 1.06%
* On November 6, 2008, the Fund's underlying index changed from the S&P
REIT Composite Index to the S&P United States REIT Index. Therefore, the
Fund's performance and historical returns shown for the periods prior to
November 6, 2008 are not necessarily indicative of the performance that
the Fund, based on its current Index, would have generated. The inception
date of the Index was June 30, 2008. Returns for the Index are only
disclosed for those periods in which the Index was in existence for the
whole period.
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2007.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
64
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST US IPO INDEX FUND (FPX)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust US IPO Index Fund (the "Fund") seeks investment results that
correspond generally to the price and yield (before the Fund's fees and
expenses) of an equity index called the IPOX(R)-100 U.S. Index (the "Index").
The investment objective of the Fund is a fundamental policy that may be changed
only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.26%
--------
Total Annual Fund Operating Expenses 0.66%
Fee Waiver and Expense Reimbursement (2) 0.06%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$61 $248 $463 $1,081
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.60% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.60% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 30% of the average value of its portfolio.
65
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FIRST TRUST US IPO INDEX FUND (FPX)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by IPOX(R) Schuster LLC
("IPOX(R)"). The Index is a modified, value-weighted price index measuring the
performance of the top U.S. companies ranked quarterly by market capitalization
in the IPOX(R) Global Composite Index. The Index utilizes a 10% capping on all
constituents and includes the 100 largest, typically best performing and most
liquid initial public offerings ("IPOs") in the IPOX(R) Global Composite Index.
An IPO is a public offering in which the shares of stock in a company are sold
to the general public for the first time, usually on an exchange. The Index is
derived by ranking the applicable stocks by total market capitalization, which
is the total number of shares outstanding times closing price. The inception
date of the Index was January 3, 1989. In general, eligible constituents are
added on the sixth day of trading and remain eligible to be included in the
Index for approximately four years. The Index includes the securities of small
and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
ENERGY COMPANIES RISK. The Fund invests in the securities of energy companies,
which include integrated oil companies that are involved in the exploration,
production and refining process, gas distributors and pipeline-related companies
and other energy companies involved with mining, producing and delivering
energy-related services and drilling. General problems of energy companies
include volatile fluctuations in price and supply of energy fuels, international
politics, terrorist attacks, reduced demand, the success of exploration
projects, clean-up and litigation costs relating to oil spills and environmental
damage, and tax and other regulatory policies of various governments. Natural
disasters such as hurricanes in the Gulf of Mexico also impact the petroleum
industry. Oil production and refining companies are subject to extensive
federal, state and local environmental laws and regulations regarding air
emissions and the disposal of hazardous materials. In addition, oil prices are
generally subject to extreme volatility.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
INFORMATION TECHNOLOGY COMPANIES RISK. The Fund invests in information
technology companies, which are generally subject to the risks of rapidly
changing technologies; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
IPO RISK. The Fund invests in companies that have recently conducted an initial
public offering. The stocks of such companies are often subject to extreme price
volatility and speculative trading. These stocks may have exhibited
above-average price appreciation in connection with the initial public offering
prior to inclusion in the Index. The price of stocks included in the Index may
not continue to appreciate and the performance of these stocks may not replicate
the performance exhibited in the past.
66
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FIRST TRUST US IPO INDEX FUND (FPX)
--------------------------------------------------------------------------------
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
67
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FIRST TRUST US IPO INDEX FUND (FPX)
--------------------------------------------------------------------------------
FIRST TRUST US IPO INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 14.53%
2008 -43.88%
2009 44.93%
2010 18.28%
2011 3.11%
2012 30.01%
2013 47.98%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 19.72% and -26.27%, respectively, for the
quarters ended March 31, 2012 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(4/12/2006)
Return Before Taxes 47.98% 27.73% 12.16%
Return After Taxes on Distributions 47.60% 27.23% 11.81%
Return After Taxes on Distributions and Sale of Shares 27.13% 22.80% 9.77%
IPOX(R)-100 U.S. Index (reflects no deduction for fees,
expenses or taxes) 48.88% 28.56% 12.86%
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 7.27%
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
Portfolio Managers
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
68
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FIRST TRUST US IPO INDEX FUND (FPX)
--------------------------------------------------------------------------------
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
69
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust Value Line(R) 100 Exchange-Traded Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the Value Line(R) 100
Index(TM) (the "Index"). The investment objective of the Fund is a fundamental
policy that may be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.50%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.37%
--------
Total Annual Fund Operating Expenses 0.87%
Fee Waiver and Expense Reimbursement (2) 0.17%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.70%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.70% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$72 $300 $562 $1,312
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.70% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.70% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 350% of the average value of its portfolio.
70
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FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by Value Line(R) Publishing,
Inc. ("Value Line(R)"). The Index is an equal-dollar weighted index that is
designed to objectively identify and select 100 stocks from the universe of
stocks to which Value Line(R) assigns a #1 ranking in the Value Line(R)
Timeliness(TM) Ranking System (the "Ranking System"). The Index is comprised of
securities of companies that are listed on a U.S. exchange. The inception date
of the Index was January 16, 2007. The Timeliness(TM) rank measures the expected
price performance relative to the other stocks in the universe over the
following six to 12 months. The Ranking System was introduced in its present
form in 1965. Each week, Value Line(R) screens a wide array of data, using a
series of proprietary calculations, such as long-term earnings and price trends,
recent company earnings and price performance and earnings relative to
expectations, to assign a Timeliness(TM) rank to each of the approximately 1,700
stocks in the Value Line(R) universe, representing more than 90 industries, from
#1 (highest) to #5 (lowest) based on their expected price performance relative
to the other stocks in the universe over the following six to 12 months. At any
one time, only 100 stocks are ranked #1 in the Ranking System. As of March 31,
2014, the Index was comprised of 100 component securities. The Index includes
the securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High portfolio turnover may result in the Fund paying higher levels of
transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause the Fund's performance to be less than you
expect.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
71
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FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
--------------------------------------------------------------------------------
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past ten years as well as the average
annual Fund and Index returns for the one year, five year, ten year and since
inception periods ended December 31, 2013. The bar chart and table provide an
indication of the risks of investing in the Fund by showing changes in the
Fund's performance from year-to-year and by showing how the Fund's average
annual total returns based on net asset value compare to those of the Index and
a broad-based market index. The Fund commenced operations as First Trust Value
Line(R) 100 Fund, a closed-end fund, on June 12, 2003. Results for periods prior
to June 18, 2007 are of First Trust Value Line(R) 100 Fund. See "Total Return
Information" for additional performance information regarding the Fund. The
Fund's performance information is accessible on the Fund's website at
www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2004 13.05%
2005 11.86%
2006 4.60%
2007 19.91%
2008 -48.30%
2009 12.74%
2010 29.50%
2011 -7.92%
2012 8.53%
2013 39.44%
During the ten-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 17.21% and -29.04%, respectively, for the
quarters ended December 31, 2011 and December 31, 2008. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
72
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FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years 10 Years Since Inception
(6/12/2003)
Return Before Taxes 39.44% 15.26% 5.25% 5.99%
Return After Taxes on Distributions 39.23% 15.08% 4.12% 4.90%
Return After Taxes on Distributions and Sale of Shares 22.32% 12.23% 3.84% 4.48%
Value Line(R) 100 Index* (reflects no deduction
for fees, expenses or taxes) 40.93% 16.35% N/A N/A
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 7.88% 8.77%
* On June 15, 2007, the Fund acquired the assets and adopted the financial
and performance history of First Trust Value Line(R) 100 Fund (the
"Predecessor FVL Fund," a closed-end fund), which had an inception date
of June 12, 2003. The inception date total returns at net asset value
include the sales load of $0.675 per share on the initial offering. The
investment goals, strategies and policies of the Fund are substantially
similar to those of the Predecessor FVL Fund. The inception date of the
Index was January 16, 2007. Returns for the Index are only disclosed for
those periods in which the Index was in existence for the entire period.
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2003, with the exception of Daniel
Lindquist and Stan Ueland, who have served since 2004 and 2006, respectively.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
73
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust Value Line(R) Dividend Index Fund (the "Fund") seeks investment
results that correspond generally to the price and yield (before the Fund's fees
and expenses) of an equity index called the Value Line(R) Dividend Index (the
"Index"). The investment objective of the Fund is a fundamental policy that may
be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.50%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 0.26%
-------
Total Annual Fund Operating Expenses 0.76%
Fee Waiver and Expense Reimbursement (2) 0.06%
-------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.70%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.70% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$72 $280 $517 $1,198
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.70% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.70% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 71% of the average value of its portfolio.
74
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FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by Value Line(R) Publishing,
Inc. The Index is designed to objectively identify and select those stocks from
the universe of stocks of which Value Line, Inc.(R) ("Value Line(R)") gives a
Safety(TM) Ranking of #1 or #2 in the Value Line(R) Safety(TM) Ranking System
and have the potential to pay above average dividends and capital appreciation.
The Safety(TM) ranking measures the total risk of a stock relative to the other
stocks in the Value Line(R) universe.
The Index is a modified equal-dollar weighted index comprised of U.S.
exchange-listed securities of companies that pay above-average dividends and
have potential for capital appreciation. The inception date of the Index was
July 3, 2006. On March 31, 2014, there were 173 securities that comprised the
Index. The Index includes the securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER STAPLES COMPANIES RISK. The Fund invests in the securities of consumer
staples companies, which provide products directly to the consumer that are
typically considered non-discretionary items based on consumer purchasing
habits. The success of these companies is affected by a variety of factors, such
as government regulations, which may affect the permissibility of using various
food additives and the production methods of companies that manufacture food
products.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
UTILITIES COMPANIES RISK. The Fund invests in the securities of utilities
companies. General problems of utilities companies include the imposition of
rate caps, increased competition due to deregulation, the difficulty in
75
--------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
--------------------------------------------------------------------------------
obtaining an adequate return on invested capital or in financing large
construction projects, the limitations on operations and increased costs and
delays attributable to environmental considerations and the capital market's
ability to absorb utility debt. In addition, taxes, government regulation,
international politics, price and supply fluctuations, volatile interest rates
and energy conservation may cause difficulties for utilities. All of such
issuers have been experiencing certain of these problems in varying degrees.
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past ten years as well as the average
annual Fund and Index returns for the one year, five year, ten year and since
inception periods ended December 31, 2013. The bar chart and table provide an
indication of the risks of investing in the Fund by showing changes in the
Fund's performance from year-to-year and by showing how the Fund's average
annual total returns based on net asset value compare to those of the Index, a
broad-based market index and a specialized securities market index. The Fund
commenced operations as First Trust Value Line(R) Dividend Fund, a closed-end
fund, on August 19, 2003. Results for periods prior to December 18, 2006 are of
First Trust Value Line(R) Dividend Fund. See "Total Return Information" for
additional performance information regarding the Fund. The Fund's performance
information is accessible on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2004 18.78%
2005 6.59%
2006 20.11%
2007 -3.42%
2008 -24.17%
2009 19.58%
2010 16.08%
2011 9.03%
2012 11.17%
2013 26.57%
During the ten-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 14.54% and -16.42%, respectively, for the
quarters ended June 30, 2009 and December 31, 2008. The Fund's past performance
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.
76
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FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years 10 Years Since Inception
(8/19/2003)
Return Before Taxes 26.57% 16.32% 9.02% 9.31%
Return After Taxes on Distributions 25.25% 15.14% 7.32% 7.61%
Return After Taxes on Distributions and Sale of Shares 14.99% 12.58% 6.60% 6.86%
Value Line(R) Dividend Index* (reflects no deduction for
fees, expenses or taxes) 27.60% 17.25% N/A N/A
S&P 500(R) Index (reflects no deduction for fees,
expenses or taxes) 32.39% 17.94% 7.41% 8.28%
Dow Jones U.S. Select Dividend Index(SM) (reflects no
deduction for fees, expenses or taxes) 29.06% 16.16% N/A N/A
* On December 15, 2006, the Fund acquired the assets and adopted the
financial and performance history of First Trust Value Line(R) Dividend
Fund (the "Predecessor FVD Fund," a closed-end fund), which had an
inception date of August 19, 2003. The inception date total returns at net
asset value include the sales load of $0.675 per share on the initial
offering. The investment goals, strategies and policies of the Fund are
substantially similar to those of the Predecessor FVD Fund. The inception
date of the Index was July 3, 2006. Returns for the Index are only
disclosed for those periods in which the Index was in existence for the
entire period.
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2003, with the exception of Daniel
Lindquist and Stan Ueland, who have served since 2004 and 2006, respectively.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
77
--------------------------------------------------------------------------------
SUMMARY INFORMATION
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The First Trust Value Line(R) Equity Allocation Index Fund (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the Value Line(R) Equity
Allocation Index (the "Index"). The investment objective of the Fund is a
fundamental policy that may be changed only with shareholder approval.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. Investors purchasing and selling shares may be subject
to costs (including customary brokerage commissions) charged by their broker,
which are not reflected in the table below.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each
year as a percentage of the value of your investment)
Management Fees 0.50%
Distribution and Service (12b-1) Fees (1) 0.00%
Other Expenses 1.51%
--------
Total Annual Fund Operating Expenses 2.01%
Fee Waiver and Expense Reimbursement (2) 1.31%
--------
Total Net Annual Fund Operating Expenses After
Fee Waiver and Expense Reimbursement 0.70%
EXAMPLE
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does not
take into account customary brokerage commissions that you pay when
purchasing or selling shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated. The example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain at current levels until
April 30, 2015. Additionally, the example assumes that First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.70% of average daily net assets per
year will be terminated following April 30, 2015. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$72 $503 $1,017 $2,430
--------------
(1) Although the Fund has adopted a 12b-1 plan that permits it to pay up to
0.25% per annum, it will not pay 12b-1 fees at any time before April 30,
2015.
(2) First Trust Advisors L.P. ("First Trust") has agreed to waive fees and/or
pay the Fund's expenses to the extent necessary to prevent the operating
expenses of the Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes, and extraordinary expenses) from
exceeding 0.70% of its average daily net assets per year at least until
April 30, 2015. Expenses borne or fees waived by First Trust are subject
to reimbursement by the Fund for up to three years from the date the fee
was waived or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in the Fund's expenses
exceeding 0.70% of its average daily net assets per year. The agreement
may be terminated by the Trust on behalf of the Fund at any time and by
First Trust only after April 30, 2015 upon 60 days' written notice.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's
performance. During the most recent fiscal year, the Fund's portfolio
turnover rate was 186% of the average value of its portfolio.
78
--------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its net assets plus the amount of
any borrowings for investment purposes in common stocks that comprise the Index.
The Fund, using an "indexing" investment approach, attempts to replicate, before
fees and expenses, the performance of the Index. First Trust seeks a correlation
of 0.95 or better (before fees and expenses) between the Fund's performance and
the performance of the Index; a figure of 1.00 would represent perfect
correlation.
The Index is developed, maintained and sponsored by Value Line(R) Publishing,
Inc. ("Value Line(R)"). The Index is designed to objectively identify and select
those stocks from the Value Line(R) 1700 universe of stocks across market
capitalizations and investment styles for growth and value that appear to have
the greatest potential for capital appreciation. The Index is a modified
equal-dollar weighted index comprised of U.S. exchange-listed securities of
companies with capital appreciation potential. The inception date of the Index
was May 1, 2006. On March 31, 2014, there were 95 securities that comprised the
Index. The Index includes the securities of small and mid cap companies.
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CONSUMER DISCRETIONARY COMPANIES RISK. The Fund invests in consumer
discretionary companies, which are companies that provide non-essential goods
and services, such as retailers, media companies and consumer services. These
companies manufacture products and provide discretionary services directly to
the consumer, and the success of these companies is tied closely to the
performance of the overall domestic and international economy, interest rates,
competition and consumer confidence. Success depends heavily on disposable
household income and consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer discretionary
products in the marketplace.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
FINANCIAL COMPANIES RISK. Financial companies are especially subject to the
adverse effects of economic recession, currency exchange rates, government
regulation, decreases in the availability of capital, volatile interest rates,
portfolio concentrations in geographic markets and in commercial and residential
real estate loans, and competition from new entrants in their fields of
business.
INDEX CORRELATION RISK. You should anticipate that the value of Fund shares will
decline more or less in correlation with any decline in the value of the Fund's
Index.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High portfolio turnover may result in the Fund paying higher levels of
transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause the Fund's performance to be less than you
expect.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations, and the securities may be
issued by companies concentrated in a particular industry if the Index is so
concentrated. Therefore, the Fund will generally not sell a security because its
issuer is in financial trouble, unless that security is removed or is
anticipated to be removed from the Index.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than those of larger, more established
companies as a result of several factors, including limited trading volumes,
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than larger, more established companies.
79
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FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
--------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
The bar chart and table below illustrate the annual calendar year returns of the
Fund based on net asset value for the past seven years as well as the average
annual Fund and Index returns for the one year, five year and since inception
periods ended December 31, 2013. The bar chart and table provide an indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year-to-year and by showing how the Fund's average annual total
returns based on net asset value compare to those of the Index and a broad-based
market index. See "Total Return Information" for additional performance
information regarding the Fund. The Fund's performance information is accessible
on the Fund's website at www.ftportfolios.com.
Returns before taxes do not reflect the effects of any income or capital gains
taxes. All after-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect the impact of
any state or local tax. Returns after taxes on distributions reflect the taxed
return on the payment of dividends and capital gains. Returns after taxes on
distributions and sale of shares assume you sold your shares at period end, and,
therefore, are also adjusted for any capital gains or losses incurred. Returns
for the market indices do not include expenses, which are deducted from Fund
returns, or taxes.
Your own actual after-tax returns will depend on your specific tax situation and
may differ from what is shown here. After-tax returns are not relevant to
investors who hold Fund shares in tax-deferred accounts such as individual
retirement accounts (IRAs) or employee-sponsored retirement plans.
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND--TOTAL RETURNS
CALENDAR YEAR TOTAL RETURNS AS OF 12/31
Performance Year Total Return
---------------- ------------
2007 4.65%
2008 -35.45%
2009 34.15%
2010 19.85%
2011 -9.56%
2012 8.76%
2013 34.65%
During the seven-year period ended December 31, 2013, the Fund's highest and
lowest calendar quarter returns were 18.63% and -21.19%, respectively, for the
quarters ended September 30, 2009 and December 31, 2008. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the
Fund will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
1 Year 5 Years Since Inception
(12/5/2006)
Return Before Taxes 34.65% 16.31% 5.11%
Return After Taxes on Distributions 34.11% 15.74% 4.59%
Return After Taxes on Distributions and Sale of Shares 19.58% 12.91% 3.76%
Value Line(R) Equity Allocation Index (reflects no
deduction for fees, expenses or taxes) 35.74% 17.37% 5.98%
Russell 3000(R) Index (reflects no deduction for fees,
expenses or taxes) 33.55% 18.71% 6.44%
80
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FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
--------------------------------------------------------------------------------
MANAGEMENT
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor")
PORTFOLIO MANAGERS
The Fund's portfolio is managed by a team (the "Investment Committee")
consisting of:
o Daniel J. Lindquist, Chairman of the Investment Committee and Managing
Director of First Trust;
o Jon C. Erickson, Senior Vice President of First Trust;
o David G. McGarel, Chief Investment Officer and Managing Director of First
Trust;
o Roger F. Testin, Senior Vice President of First Trust; and
o Stan Ueland, Senior Vice President of First Trust.
Each Investment Committee member has served as a part of the portfolio
management team of the Fund since 2006.
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems shares on a continuous basis, at net asset value,
only in Creation Units consisting of 50,000 shares. The Fund's Creation Units
are issued and redeemed principally in-kind for securities included in the
Fund's portfolio, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements. Individual shares may
only be purchased and sold on NYSE Arca through a broker-dealer. Shares of the
Fund trade on NYSE Arca at market prices rather than net asset value, which may
cause the shares to trade at a price greater than net asset value (premium) or
less than net asset value (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains. Distributions on shares held in a tax-deferred account,
while not immediately taxable, will be subject to tax when the shares are no
longer held in a tax-deferred account.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust Portfolios L.P., the
Fund's distributor, may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary's website for more information.
81
ADDITIONAL INFORMATION ON THE FUNDS' INVESTMENT OBJECTIVES AND STRATEGIES
Each Fund is a series of the First Trust Exchange-Traded Fund (the "Trust"), an
investment company and an exchange-traded "index fund." The investment objective
of each Fund is to seek investment results that correspond generally to the
price and yield (before each Fund's fees and expenses) of such Fund's
corresponding equity index (each Fund's corresponding equity index is referred
to herein as an "Index," and together, as the "Indices;" the provider of each
Fund's Index is referred to herein as an "Index Provider" and collectively, as
the "Index Providers").
Each Fund will normally invest at least 90% of its net assets in common stocks
that comprise each Fund's respective Index. Each Fund's investment objective
(with the exception of the First Trust Dow Jones Select MicroCap Index Fund,
First Trust Morningstar Dividend Leaders Index Fund, First Trust NASDAQ-100
Equal Weighted Index Fund, First Trust NASDAQ-100-Technology Sector
Index Fund, First Trust US IPO Index Fund, First Trust Value Line(R) 100
Exchange-Traded Fund, First Trust Value Line(R) Dividend Index Fund and First
Trust Value Line(R) Equity Allocation Index Fund), the 90% investment strategy
and each of the policies described herein are non-fundamental policies that may
be changed by the Board of Trustees of the Trust (the "Board") without
shareholder approval. As non-fundamental policies, each Fund's investment
objective (with the exception of the First Trust Dow Jones Select MicroCap
Index Fund, First Trust Morningstar Dividend Leaders Index Fund, First Trust
NASDAQ-100 Equal Weighted Index Fund, First Trust NASDAQ-100-Technology
Sector Index Fund, First Trust US IPO Index Fund, First Trust Value Line(R)
100 Exchange-Traded Fund, First Trust Value Line(R) Dividend Index Fund and
First Trust Value Line(R) Equity Allocation Index Fund), the 90% investment
strategy and each of the policies described herein require 60 days' prior
written notice to shareholders before they can be changed. With respect to each
of the First Trust Dow Jones Select MicroCap Index Fund, First Trust
Morningstar Dividend Leaders Index Fund, First Trust NASDAQ-100 Equal Weighted
Index Fund, First Trust NASDAQ-100-Technology Sector Index Fund, First
Trust US IPO Index Fund, First Trust Value Line(R) 100 Exchange-Traded Fund,
First Trust Value Line(R) Dividend Index Fund and First Trust Value Line(R)
Equity Allocation Index Fund, the investment objective is a fundamental policy
that may be changed only with shareholder approval. Certain fundamental policies
of the Funds are set forth in the Statement of Additional Information ("SAI")
under "Investment Objectives and Policies."
In seeking to achieve each Fund's investment objective, the Fund generally will
invest in all of the securities comprising its Index, in proportion to their
weightings in the Index. However, in certain limited circumstances, it may not
be possible or practicable to purchase all of those stocks in those weightings.
In those circumstances, a Fund may purchase a sample of stocks in its Index.
There may also be limited instances in which First Trust may choose to
overweight certain stocks in the applicable Index, purchase securities not in
the Index which First Trust believes are appropriate to substitute for certain
securities in the Index, use futures or derivative instruments, or utilize
various combinations of the above techniques in seeking to track the Index. A
Fund may sell stocks that are represented in its Index in anticipation of their
removal from the Index or purchase stocks not represented in the Index in
anticipation of their addition to the Index.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the policies and procedures with respect to the disclosure of
each Fund's portfolio securities is included in the Funds' SAI and on the Funds'
website at www.ftportfolios.com.
ADDITIONAL RISKS OF INVESTING IN THE FUNDS
Risk is inherent in all investing. Investing in a Fund involves risk, including
the risk that you may lose all or part of your investment. There can be no
assurance that a Fund will meet its stated objective. Before you invest, you
should consider the following risks in addition to the Principal Risks set forth
above in this prospectus.
BORROWING AND LEVERAGE RISK. When a Fund borrows money, it must pay interest and
other fees, which will reduce the Fund's returns if such costs exceed the
returns on the portfolio securities purchased or retained with such borrowings.
Any such borrowings are intended to be temporary. However, under certain market
conditions, including periods of low demand or decreased liquidity, such
borrowings might be outstanding for longer periods of time. As prescribed by the
Investment Company Act of 1940, as amended (the "1940 Act"), the Fund will be
required to maintain specified asset coverage of at least 300% with respect to
any bank borrowing immediately following such borrowing. The Fund may be
required to dispose of assets on unfavorable terms if market fluctuations or
other factors reduce the Fund's asset coverage to less than the prescribed
amount.
CASH TRANSACTIONS RISK. First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund
may, under certain circumstances, effect a portion of its redemptions for cash,
rather than in-kind securities. In particular, the call option portion of the
Fund's portfolio, if applicable, may be redeemed for cash. As a result, an
investment in the Fund may be less tax-efficient than an investment in a more
conventional exchange-traded fund. Because the Fund may effect a portion of
redemptions for cash, rather than in-kind distributions, it may be required to
sell portfolio securities in order to obtain the cash needed to distribute
82
redemption proceeds. A sale of shares may result in capital gains or losses, and
may also result in higher brokerage costs.
CONCENTRATION RISK. A Fund will be concentrated in the securities of an
individual industry if the Fund's corresponding Index is concentrated in an
individual industry. A concentration makes the Fund more susceptible to any
single occurrence affecting the industry and may subject the Fund to greater
market risk than more diversified funds.
DEPOSITARY RECEIPTS RISK. In addition to the risks above in "Principal Risks --
Depositary Receipts Risk," an investment in depositary receipts involves further
risks due to certain features of depositary receipts. Depositary receipts are
usually in the form of ADRs or Glodal Depositary Receipts ("GDRs"). ADRs are
U.S. dollar-denominated receipts representing shares of foreign-based
corporations. ADRs are issued by U.S. banks or trust companies, and entitle the
holder to all dividends and capital gains that are paid out on the underlying
foreign shares. GDRs are similar to ADRs, but are shares of foreign-based
corporations generally issued by international banks in one or more markets
around the world. ADRs or GDRs may be less liquid than the underlying shares in
their primary trading market. Any distributions paid to the holders of
depositary receipts are usually subject to a fee charged by the depositary.
Holders of depositary receipts may have limited voting rights pursuant to a
deposit agreement between the underlying issuer and the depositary. In certain
cases, the depositary will vote the shares deposited with it as directed by the
underlying issuer's board of directors. Furthermore, investment restrictions in
certain countries may adversely impact the value of depositary receipts because
such restrictions may limit the ability to convert shares into depositary
receipts and vice versa. Such restrictions may cause shares of the underlying
issuer to trade at a discount or premium to the market price of the depositary
receipt. Moreover, if depositary receipts are converted into shares, the laws in
certain countries may limit the ability of a non-resident to trade the shares
and to reconvert the shares to depositary receipts.
Depositary receipts may be "sponsored" or "unsponsored." Sponsored depositary
receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored depositary receipts may be established by a depositary
without participation by the underlying issuer. Holders of unsponsored
depositary receipts generally bear all the costs associated with establishing
the unsponsored depositary receipts. In addition, the issuers of the securities
underlying unsponsored depositary receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts may be unregistered and unlisted. A Fund's investments may
also include depositary receipts that are not purchased in the public markets
and are restricted securities that can be offered and sold only to "qualified
institutional buyers" under Rule 144A under the Securities Act of 1933, as
amended ("Securities Act"). Moreover, if adverse market conditions were to
develop during the period between a Fund's decision to sell these types of
depositary receipts and the point at which a Fund is permitted or able to sell
such security, the Fund might obtain a price less favorable than the price that
prevailed when it decided to sell.
EMERGING MARKETS RISK. In addition to the risks described above in "Principal
Risks--Non U.S. Securities and Emerging Markets Risk," an investment in emerging
market companies involves certain further risks not associated with investing in
developed market countries because emerging market countries are often in the
initial stages of their industrialization cycles and have low per capita income.
These increased risks include the possibility of investment and trading
limitations, greater liquidity concerns, higher price volatility, greater delays
and possibility of disruptions in settlement transactions, greater political
uncertainties and greater dependence on international trade or development
assistance. In addition, emerging market countries may be subject to
overburdened infrastructures and environmental problems.
EXPENSE REIMBURSEMENT AND RECOUPMENT RISK. For certain Funds, the Advisor has
entered into an agreement with the Trust in which the Advisor has agreed to
waive certain fees and/or reimburse such Funds for expenses exceeding an agreed
upon amount. This agreement may be terminated by the Trust on behalf of a Fund
at any time and by the Advisor only after April 30, 2015 upon 60 days' written
notice. The Advisor is also entitled to recoup from the applicable Funds any
waived fees or reimbursed amounts pursuant to the agreement for a period of up
to three years from the date of waiver or reimbursement. Any such recoupment or
modification or termination of the agreement could negatively affect the
applicable Fund's returns.
INFLATION RISK. Inflation risk is the risk that the value of assets or income
from investments will be less in the future as inflation decreases the value of
money. As inflation increases, the value of a Fund's assets can decline as can
the value of a Fund's distributions. Stock prices may be particularly sensitive
to rising interest rates, as the cost of capital rises and borrowing costs
increase.
INTELLECTUAL PROPERTY RISK. Each Fund relies on a license and related sublicense
that permits the Fund to use its Index and associated trade names, trademarks
and service marks (the "Intellectual Property") in connection with the name and
investment strategies of the Fund. Such license and related sublicense may be
terminated by the Index Provider, and, as a result, the Fund may lose its
83
ability to use the Intellectual Property. There is also no guarantee that the
Index Provider has all rights to license the Intellectual Property for use by
the Fund. Accordingly, in the event the license is terminated or the Index
Provider does not have rights to license the Intellectual Property, it may have
a significant effect on the operation of the Fund.
ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular
type of security can be more volatile than the market as a whole and can perform
differently from the value of the market as a whole.
MARKET MAKER RISK. Certain of the Funds, especially those with lower average
daily trading volumes, may rely on a small number of third-party market makers
to provide a market for the purchase and sale of shares. Any trading halt or
other problem relating to the trading activity of these market makers could
result in a dramatic change in the spread between a Fund's net asset value and
the price at which such Fund's shares are trading on the Exchange. This could
result in a decrease in value of a Fund's shares.
NON-U.S. SECURITIES RISK. In addition to the risks described above in "Principal
Risks--Non U.S. Securities and Emerging Markets Risk," an investment in
securities of non-U.S. companies involves other risks not associated with
domestic issuers. Investment in non-U.S. securities may involve higher costs
than investment in U.S. securities, including higher transaction and custody
costs as well as the imposition of additional taxes by non-U.S. governments.
Non-U.S. investments may also involve risks associated with the level of
currency exchange rates, less complete financial information about the issuers,
less market liquidity, more market volatility and political instability. Future
political and economic developments, the possible imposition of withholding
taxes on dividend income, the possible seizure or nationalization of non-U.S.
holdings, the possible establishment of exchange controls or freezes on the
convertibility of currency, or the adoption of other governmental restrictions
might adversely affect an investment in non-U.S. securities. Additionally,
non-U.S. issuers may be subject to less stringent regulation, and to different
accounting, auditing and recordkeeping requirements.
PASSIVE INVESTMENT RISK. No Fund is actively managed. A Fund may be affected by
a general decline in certain market segments relating to its Index. A Fund
invests in securities included in or representative of its Index regardless of
their investment merit. A Fund generally will not attempt to take defensive
positions in declining markets.
TRADING ISSUES
Although shares of each Fund are listed for trading on NASDAQ(R) or NYSE Arca,
there can be no assurance that an active trading market for such shares will
develop or be maintained. Trading in shares on an Exchange may be halted due to
market conditions or for reasons that, in the view of such Exchange, make
trading in shares inadvisable. In addition, trading in shares on an Exchange is
subject to trading halts caused by extraordinary market volatility pursuant to
Exchange "circuit breaker" rules. There can be no assurance that the
requirements of the Exchanges necessary to maintain the listing of the Funds
will continue to be met or will remain unchanged. Due to the small asset size of
some of the Funds, these Funds are more likely to have difficulty maintaining
their listing on a given Exchange.
FLUCTUATION OF NET ASSET VALUE
The net asset value of shares of each Fund will generally fluctuate with changes
in the market value of such Fund's holdings. The market prices of shares will
generally fluctuate in accordance with changes in net asset value as well as the
relative supply of and demand for shares on an Exchange. First Trust cannot
predict whether shares will trade below, at or above their net asset value.
Price differences may be due, in large part, to the fact that supply and demand
forces at work in the secondary trading market for shares will be closely
related to, but not identical to, the same forces influencing the prices of the
stocks of the Funds trading individually or in the aggregate at any point in
time. However, given that shares can be purchased and redeemed in Creation Units
(unlike shares of closed-end funds, which frequently trade at appreciable
discounts from, and sometimes at premiums to, their net asset value), First
Trust believes that large discounts or premiums to the net asset value of shares
should not be sustained.
FUND ORGANIZATION
Each Fund is a series of the Trust, an investment company registered under the
1940 Act. Each Fund is treated as a separate fund with its own investment
objective and policies. The Trust is organized as a Massachusetts business
trust. Its Board is responsible for the overall management and direction of the
Trust. The Board elects the Trust's officers and approves all significant
agreements, including those with the investment advisor, custodian and fund
administrative and accounting agent.
84
MANAGEMENT OF THE FUNDS
First Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois 60187, is
the investment advisor to the Funds. In this capacity, First Trust is
responsible for the selection and ongoing monitoring of the securities in each
Fund's portfolio and certain other services necessary for the management of the
portfolios.
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of
DuPage L.P. is a limited partnership with one general partner, The Charger
Corporation, and a number of limited partners. The Charger Corporation is an
Illinois corporation controlled by James A. Bowen, the Chief Executive Officer
of the Advisor. First Trust discharges its responsibilities subject to the
policies of the Board.
First Trust serves as advisor or sub-advisor to 6 mutual fund portfolios, 9
exchange-traded funds (including the Trust) consisting of 86 series and 15
closed-end funds and is also the portfolio supervisor of certain unit investment
trusts sponsored by First Trust Portfolios L.P. ("FTP"), 120 East Liberty Drive,
Wheaton, Illinois 60187. FTP specializes in the underwriting, trading and
distribution of unit investment trusts and other securities. FTP is the
principal underwriter of the shares of each Fund.
There is no one individual primarily responsible for portfolio management
decisions for the Funds. Investments are made under the direction of the
Investment Committee. The Investment Committee consists of Daniel J. Lindquist,
Jon C. Erickson, David G. McGarel, Roger F. Testin and Stan Ueland.
o Mr. Lindquist is Chairman of the Investment Committee and
presides over Investment Committee meetings. Mr. Lindquist is
responsible for overseeing the implementation of each Fund's
investment strategy. Mr. Lindquist joined First Trust as a
Vice President in April 2004 and was a Senior Vice President
of First Trust and FTP from September 2005 to July 2012. Mr.
Lindquist has been a Managing Director of First Trust and FTP
since 2012.
o Mr. Erickson has been a Senior Vice President of First Trust
and FTP since 2001. As the head of First Trust's Equity
Research Group, Mr. Erickson is responsible for determining
the securities to be purchased and sold by funds that do not
utilize quantitative investment strategies.
o Mr. McGarel has been Chief Investment Officer and Managing
Director since 2012. From 2004 to 2012, he was a Senior Vice
President of First Trust and FTP. As First Trust's Chief
Investment Officer, Mr. McGarel consults with the Investment
Committee on market conditions and First Trust's general
investment philosophy.
o Mr. Testin has been a Senior Vice President of First Trust and
FTP since 2003. Mr. Testin is the head of First Trust's
Portfolio Management Group.
o Mr. Ueland has been a Senior Vice President of First Trust and
FTP since September 2012. Mr. Ueland is responsible for
executing the investment strategies of each portfolio of
exchange-traded index funds advised by First Trust. Mr. Ueland
joined First Trust as a Vice President in August 2005.
For the First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund, John Gambla and
Rob A. Guttschow also serve on the Investment Committee.
o Mr. Gambla has been a Senior Portfolio Manager of First Trust
and FTP since 2011. Prior to joining First Trust, he was a
Co-Chief Investment Officer at Nuveen HydePark Group LLC.
o Mr. Guttschow has been a Senior Portfolio Manager of First
Trust and FTP since 2011. Prior to joining First Trust, he was
a Co-Chief Investment Officer at Nuveen HydePark Group LLC.
For additional information concerning First Trust, including a description of
the services provided to the Funds, see the Funds' SAI. In addition, the SAI
provides additional information about the compensation of Investment Committee
members, other accounts managed by members of the Investment Committee and
ownership by members of the Investment Committee of shares of the Funds.
The table below sets forth the annual management fee that First Trust may
receive from each Fund. The table also shows the amounts paid by the Funds to
First Trust for the fiscal year ended December 31, 2013 (net of expense
reimbursements) as a percentage of average daily net assets. A discussion
regarding the basis of the Board's approval of the continuation of the
Investment Management Agreement for all Funds will be available in the Funds'
Semi-Annual Reports to Shareholders for the period ended June 30, 2014.
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[Enlarge/Download Table]
MANAGEMENT FEE
ANNUAL ANNUAL PAID FOR THE YEAR
MANAGEMENT FEE EXPENSE CAP EXPENSE CAP ENDED 12/31/13
(% OF AVERAGE (% OF AVERAGE TERMINATION (% OF AVERAGE
FUND DAILY NET ASSETS) DAILY NET ASSETS) DATE DAILY NET ASSETS)
------------------------------------------------------ ----------------- ----------------- ----------------- -------------------
First Trust Capital Strength ETF 0.50% 0.65% April 30, 2015 0.39%
First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund 0.60% 0.60% N/A 0.60%
First Trust Dow Jones Internet Index Fund 0.40% 0.60% April 30, 2015 0.40%
First Trust Dow Jones Select MicroCap Index Fund 0.50% 0.60% April 30, 2015 0.38%
First Trust ISE Chindia Index Fund 0.40% 0.60% April 30, 2015 0.34%
First Trust ISE-Revere Natural Gas Index Fund 0.40% 0.60% April 30, 2015 0.40%
First Trust ISE Water Index Fund 0.40% 0.60% April 30, 2015 0.40%
First Trust Morningstar Dividend Leaders Index Fund 0.30% 0.45% April 30, 2015 0.26%
First Trust NASDAQ-100 Equal Weighted Index Fund 0.40% 0.60% April 30, 2015 0.37%
First Trust NASDAQ-100 Ex-Technology Sector Index Fund 0.40% 0.60% April 30, 2015 0.33%
First Trust NASDAQ-100-Technology Sector Index Fund 0.40% 0.60% April 30, 2015 0.38%
First Trust NASDAQ(R) ABA Community Bank Index Fund 0.40% 0.60% April 30, 2015 0.24%
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund 0.40% 0.60% April 30, 2015 0.30%
First Trust NYSE Arca Biotechnology Index Fund 0.40% 0.60% April 30, 2015 0.40%
First Trust S&P REIT Index Fund 0.30% 0.50% April 30, 2015 0.50%
First Trust US IPO Index Fund 0.40% 0.60% April 30, 2015 0.34%
First Trust Value Line(R) 100 Exchange-Traded Fund 0.50% 0.70% April 30, 2015 0.33%
First Trust Value Line(R) Dividend Index Fund 0.50% 0.70% April 30, 2015 0.44%
First Trust Value Line(R) Equity Allocation Index Fund 0.50% 0.70% April 30, 2015 0.00%
Each Fund (with the exception of First Trust CBOE(R) S&P 500(R) VIX(R) Tail
Hedge Fund) is responsible for all of its expenses, including the investment
advisory fees, costs of transfer agency, custody, fund administration, legal,
audit and other services, interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, paying for its
sublicensing fees related to each Fund's Index, any distribution or service
fees, and extraordinary expenses. First Trust has agreed to waive fees and/or
pay Fund expenses to the extent necessary to prevent the annual operating
expenses of each such Fund (excluding interest expense, brokerage commissions
and other trading expenses, taxes and extraordinary expenses) (the "Expense
Cap") from exceeding the Expense Cap listed above, at least through the Expense
Cap termination date listed above. Expenses borne and fees waived by First Trust
are subject to reimbursement by each Fund for up to three years from the date
the fee or expense was incurred by the Fund, but no reimbursement payment will
be made by a Fund at any time if it would result in such Fund's expenses
exceeding its Expense Cap.
For First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund, First Trust is paid
an annual unitary management fee of 0.60% of the Fund's average daily net assets
and is responsible for the expenses of the Fund including the cost of transfer
agency, custody, fund administration, legal, audit and other services, but
excluding distribution fees, if any, brokerage expense, taxes, interest,
acquired fund fees and other extraordinary expenses. First Trust CBOE(R) S&P
500(R) VIX(R) Tail Hedge Fund does not have an Expense Cap.
HOW TO BUY AND SELL SHARES
Most investors will buy and sell shares of the Funds in secondary market
transactions through brokers. Shares of the Funds are listed for trading on the
secondary market on the Exchange. Shares can be bought and sold throughout the
trading day like other publicly traded shares. There is no minimum investment
when buying shares on the Exchange. Although shares are generally purchased and
sold in "round lots" of 100 shares, brokerage firms typically permit investors
to purchase or sell shares in smaller "odd lots," at no per-share price
differential. When buying or selling shares through a broker, investors should
expect to incur customary brokerage commissions, investors may receive less than
the net asset value of the shares, and investors may pay some or all of the
spread between the bid and the offer price in the secondary market on each leg
of a round trip (purchase and sale) transaction. Share prices are reported in
dollars and cents per share.
For purposes of the 1940 Act, each Fund is treated as a registered investment
company, and the acquisition of shares by other registered investment companies
is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Trust,
on behalf of the Funds, has received an exemptive order from the Securities and
Exchange Commission that permits certain registered investment companies to
invest in a Fund beyond the limits set forth in Section 12(d)(1), subject to
certain terms and conditions, including that any such investment companies enter
into agreements with a Fund regarding the terms of any investment. The Funds
will not invest in securities of registered open-end investment companies or
registered unit investment trusts in reliance on Section 12(d)(1)(E) or Section
12(d)(1)(G) of the 1940 Act.
86
BOOK ENTRY
Shares are held in book-entry form, which means that no share certificates are
issued. The Depository Trust Company ("DTC") or its nominee is the record owner
of all outstanding shares of the Funds and is recognized as the owner of all
shares for all purposes.
Investors owning shares are beneficial owners as shown on the records of DTC or
its participants. DTC serves as the securities depository for all shares.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book-entry or "street name" form.
SHARE TRADING PRICE
The trading price of shares of a Fund on the applicable Exchange is based on
market price and may differ from such Fund's daily net asset value and can be
affected by market forces of supply and demand, economic conditions and other
factors.
The applicable Exchange intends to disseminate the approximate value of shares
of the Funds every 15 seconds. This approximate value should not be viewed as a
"real-time" update of the net asset value per share of the Funds because the
approximate value may not be calculated in the same manner as the net asset
value, which is computed once a day, generally at the end of the business day.
The Funds are not involved in, or responsible for, the calculation or
dissemination of the approximate value of shares of the Funds and the Funds do
not make any warranty as to its accuracy.
FREQUENT PURCHASES AND REDEMPTIONS OF THE FUNDS' SHARES
The Funds impose no restrictions on the frequency of purchases and redemptions
("market timing"). In determining not to approve a written, established policy,
the Board evaluated the risks of market timing activities by the Funds'
shareholders. The Board considered that a Fund's shares can only be purchased
and redeemed directly from the Fund in Creation Units by broker-dealers and
large institutional investors that have entered into participation agreements
(i.e., authorized participants ("APs")) and that the vast majority of trading in
a Fund's shares occurs on the secondary market. Because the secondary market
trades do not involve a Fund directly, it is unlikely those trades would cause
many of the harmful effects of market timing, including dilution, disruption of
portfolio management, increases in a Fund's trading costs and the realization of
capital gains. As a Fund may effect the purchase or redemption of Creation Units
in exchange wholly or partially for cash, the Board noted that such trades could
result in dilution to a Fund and increased transaction costs, which could
negatively impact a Fund's ability to achieve its investment objective. However,
the Board noted that direct trading by APs is critical to ensuring that the
shares trade at or close to net asset value. In addition, a Fund imposes fixed
and variable transaction fees on purchases and redemptions of Creation Units to
cover the custodial and other costs incurred by the Funds in effecting trades.
Finally, the Advisor monitors orders from APs for patterns of abusive trading
and each Fund reserves the right to not accept creation orders from APs that the
Advisor has determined may be disruptive to the management of such Fund, or
otherwise not in such Fund's best interests.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends from net investment income, if any, are declared and paid quarterly by
each respective Fund. Each Fund distributes its net realized capital gains, if
any, to shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom you purchased shares makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Funds. This section is current as of the date of this
prospectus. Tax laws and interpretations change frequently, and these summaries
do not describe all of the tax consequences to all taxpayers. For example, these
summaries generally do not describe your situation if you are a corporation, a
non-U.S. person, a broker-dealer or other investor with special circumstances.
In addition, this section does not describe your state, local or non-U.S. tax
consequences.
This federal income tax summary is based in part on the advice of counsel to the
Funds. The Internal Revenue Service could disagree with any conclusions set
forth in this section. In addition, counsel to the Funds was not asked to
87
review, and has not reached a conclusion with respect to, the federal income tax
treatment of the assets to be included in the Funds. This may not be sufficient
for you to use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax advisor.
FUND STATUS
Each Fund intends to continue to qualify as a "regulated investment company"
under the federal tax laws. If a Fund qualifies as a regulated investment
company and distributes its income as required by the tax law, the Fund
generally will not pay federal income taxes.
DISTRIBUTIONS
The Funds' distributions are generally taxable. After the end of each year, you
will receive a tax statement that separates the distributions of a Fund into two
categories, ordinary income distributions and capital gains dividends. Ordinary
income distributions are generally taxed at your ordinary tax rate, however, as
further discussed below, certain ordinary income distributions received from the
Fund may be taxed at the capital gains tax rates. Generally, you will treat all
capital gain dividends as long-term capital gains regardless of how long you
have owned your shares. To determine your actual tax liability for your capital
gain dividends, you must calculate your total net capital gain or loss for the
tax year after considering all of your other taxable transactions, as described
below. In addition, the Fund may make distributions that represent a return of
capital for tax purposes and thus will generally not be taxable to you; however,
such distributions may reduce basis, which could result in you having to pay
higher taxes in the future when shares are sold, even if you sell the shares at
a loss from your original investment. The tax status of your distributions from
a Fund is not affected by whether you reinvest your distributions in additional
shares or receive them in cash. The income from a Fund that you must take into
account for federal income tax purposes is not reduced by amounts used to pay a
deferred sales fee, if any. The tax laws may require you to treat distributions
made to you in January as if you had received them on December 31 of the
previous year. Under the "Health Care and Education Reconciliation Act of 2010,"
income from the Trust may also be subject to a new 3.8% "Medicare tax" imposed
for taxable years beginning after 2012. This tax will generally apply to your
net investment income if your adjusted gross income exceeds certain threshold
amounts, which are $250,000 in the case of married couples filing joint returns
and $200,000 in the case of single individuals.
CAPITAL GAINS AND LOSSES AND CERTAIN ORDINARY INCOME DIVIDENDS
If you are an individual, the maximum marginal stated federal tax rate for net
capital gain is generally 20% for taxpayers in the 39.6% tax bracket, 15% for
taxpayers in the 25%, 28%, 33% and 35% tax brackets and 0% for taxpayers in the
10% and 15% tax brackets. Capital gain received from assets held for more than
one year that is considered "unrecaptured section 1250 gain" (which may be the
case, for example, with some capital gains attributable to equity interests in
real estate investment trusts that constitute interests in entities treated as
real estate investments trusts for federal income tax purposes) is taxed at a
maximum stated tax rate of 25%. In the case of capital gains dividends, the
determination of which portion of the capital gains dividend, if any, is subject
to the 25% tax rate, will be made based on rules prescribed by the United States
Treasury. Capital gains may also be subject to the Medicare tax described above.
Net capital gain equals net long-term capital gain minus net short-term capital
loss for the taxable year. Capital gain or loss is long-term if the holding
period for the asset is more than one year and is short-term if the holding
period for the asset is one year or less. You must exclude the date you purchase
your shares to determine your holding period. However, if you receive a capital
gain dividend from a Fund and sell your shares at a loss after holding it for
six months or less, the loss will be recharacterized as long-term capital loss
to the extent of the capital gain dividend received. The tax rates for capital
gains realized from assets held for one year or less are generally the same as
for ordinary income. The Code treats certain capital gains as ordinary income in
special situations.
Ordinary income dividends received by an individual shareholder from a regulated
investment company such as the Funds are generally taxed at the same rates that
apply to net capital gain (as discussed above), provided certain holding period
requirements are satisfied and provided the dividends are attributable to
qualifying dividends received by the Funds themselves. Distributions with
respect to shares in real estate investment trusts are qualifying dividends only
in limited circumstances. The Funds will provide notice to its shareholders of
the amount of any distribution which may be taken into account as a dividend
which is eligible for the capital gains tax rates.
DIVIDENDS RECEIVED DEDUCTION
A corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the Funds
because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on shares that are attributable to qualifying dividends
received by the Funds from certain corporations may be reported by the Funds as
being eligible for the dividends received deduction.
88
SALE OF SHARES
If you sell your shares, you will generally recognize a taxable gain or loss. To
determine the amount of this gain or loss, you must subtract your tax basis in
your shares from the amount you receive in the transaction. Your tax basis in
your shares is generally equal to the cost of your shares, generally including
sales charges. In some cases, however, you may have to adjust your tax basis
after you purchase your shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If you exchange equity securities for Creation Units you will generally
recognize a gain or a loss. The gain or loss will be equal to the difference
between the market value of the Creation Units at the time and your aggregate
basis in the securities surrendered and the cash component paid. If you exchange
Creation Units for equity securities, you will generally recognize a gain or
loss equal to the difference between your basis in the Creation Units and the
aggregate market value of the securities received and the Cash Redemption
Amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing "wash sales,"
or on the basis that there has been no significant change in economic position.
DEDUCTIBILITY OF FUND EXPENSES
Expenses incurred and deducted by the Funds will generally not be treated as
income taxable to you. In some cases, however, you may be required to treat your
portion of these Fund expenses as income. In these cases you may be able to take
a deduction for these expenses. However, certain miscellaneous itemized
deductions, such as investment expenses, may be deducted by individuals only to
the extent that all of these deductions exceed 2% of the individual's adjusted
gross income.
NON-U.S. TAX CREDIT
Because the Funds may invest in non-U.S. securities, the tax statement that you
receive may include an item showing non-U.S. taxes a Fund paid to other
countries. In this case, dividends taxed to you will include your share of the
taxes such Fund paid to other countries. You may be able to deduct or receive a
tax credit for your share of these taxes. Some individuals may also be subject
to further limitations on the amount of their itemized deductions, depending on
their income.
NON-U.S. INVESTORS
If you are a non-U.S. investor (i.e., an investor other than a U.S. citizen or
resident or a U.S. corporation, partnership, estate or trust), you should be
aware that, generally, subject to applicable tax treaties, distributions from a
Fund will be characterized as dividends for federal income tax purposes (other
than dividends which a Fund properly reports as capital gain dividends) and will
be subject to U.S. federal income taxes, including withholding taxes, subject to
certain exceptions described below. However, distributions received by a
non-U.S. investor from a Fund that are properly reported by a Fund as capital
gain dividends may not be subject to U.S. federal income taxes, including
withholding taxes, provided that a Fund makes certain elections and certain
other conditions are met. In the case of dividends with respect to taxable years
of a Fund beginning prior to 2014, distributions from a Fund that are properly
reported by such Fund as an interest-related dividend attributable to certain
interest income received by the Fund or as a short-term capital gain dividend
attributable to certain net short-term capital gains income received by such
Fund may not be subject to U.S. federal income taxes, including withholding
taxes when received by certain foreign investors, provided that a Fund makes
certain elections and certain other conditions are met. Distributions after June
30, 2014 may be subject to a U.S. withholding tax of 30% in the case of
distributions to (i) certain non-U.S. financial institutions that have not
entered into an agreement with the U.S. Treasury to collect and disclose certain
information and are not resident in a jurisdiction that has entered into such an
agreement with the U.S. Treasury and (ii) certain other non-U.S. entities that
do not provide certain certifications and information about the entity's U.S.
owners. Disposition of shares by such persons may be subject to such withholding
after December 31, 2016.
INVESTMENTS IN CERTAIN NON-U.S. CORPORATIONS
If a Fund holds an equity interest in any PFICs, which are generally certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, certain rents and royalties
or capital gains) or that hold at least 50% of their assets in investments
producing such passive income, a Fund could be subject to U.S. federal income
tax and additional interest charges on gains and certain distributions with
respect to those equity interests, even if all the income or gain is timely
distributed to its shareholders. A Fund will not be able to pass through to its
shareholders any credit or deduction for such taxes. A Fund may be able to make
an election that could ameliorate these adverse tax consequences. In this case,
a Fund would recognize as ordinary income any increase in the value of such PFIC
shares, and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases included in income. Under this election, a Fund might be
required to recognize in a year income in excess of its distributions from PFICs
and its proceeds from dispositions of PFIC stock during that year, and such
89
income would nevertheless be subject to the distribution requirement and would
be taken into account for purposes of the 4% excise tax. Dividends paid by PFICs
are not treated as qualified dividend income.
DISTRIBUTION PLAN
FTP serves as the distributor of Creation Units for the Funds on an agency
basis. FTP does not maintain a secondary market in shares.
The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1
under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are
authorized to pay an amount up to 0.25% of their average daily net assets each
year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
The Funds do not currently pay 12b-1 fees, and pursuant to a contractual
arrangement, the Funds will not pay 12b-1 fees any time before April 30, 2015.
However, in the event 12b-1 fees are charged in the future, because these fees
are paid out of the Funds' assets, over time these fees will increase the cost
of your investment and may cost you more than certain other types of sales
charges.
NET ASSET VALUE
Each Fund's net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on each day the New York Stock Exchange is open for
business. Net asset value is calculated for a Fund by taking the market price of
the Fund's total assets, including interest or dividends accrued but not yet
collected, less all liabilities, and dividing such amount by the total number of
shares outstanding. The result, rounded to the nearest cent, is the net asset
value per share. All valuations are subject to review by the Board or its
delegate.
Each Fund's investments are valued at market value or, in the absence of market
value with respect to any portfolio securities, at fair value in accordance with
valuation procedures adopted by the Trust's Board of Trustees and in accordance
with the 1940 Act. Portfolio securities listed on any exchange other than
NASDAQ(R) and the London Stock Exchange Alternative Investment Market ("AIM")
are valued at the last sale price on the business day as of which such value is
being determined. Securities listed on NASDAQ(R) or the AIM are valued at the
official closing price on the business day as of which such value is being
determined. If there has been no sale on such day, or no official closing price
in the case of securities traded on NASDAQ(R) or the AIM, the securities are
valued at the mean of the most recent bid and asked prices on such day.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities trading on
NASDAQ(R) and the AIM, are valued at the mean of the bid and the asked price, if
available, and otherwise at their closing bid price. Short-term investments that
mature in less than 60 days when purchased are valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board or its delegate at fair
value. The use of fair value pricing by a Fund is governed by valuation
procedures adopted by the Board and in accordance with the provisions of the
1940 Act. These securities generally include, but are not limited to, restricted
securities (securities which may not be publicly sold without registration under
the Securities Act of 1933, as amended (the "Securities Act")) for which a
pricing service is unable to provide a market price; securities whose trading
has been formally suspended; a security whose market price is not available from
a pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of a Fund's net asset value or make
it difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by a Fund
generally results in the prices used by a Fund that may differ from the current
market quotations or official closing prices on the applicable exchange. A
variety of factors may be considered in determining the fair value of such
securities. See the SAI for details.
Valuing a Fund's securities using fair value pricing will result in using prices
for those securities that may differ from current market quotations or official
closing prices on the applicable exchange. Use of fair value prices and certain
current market quotations or official closing prices could result in a
difference between the prices used to calculate a Fund's net asset value and the
prices used by its Index, which, in turn, could result in a difference between
such Fund's performance and the performance of its Index.
90
Because foreign securities exchanges may be open on different days than the days
during which an investor may purchase or sell shares of a Fund, the value of
such Fund's securities may change on the days when investors are not able to
purchase or sell the shares of such Fund.
The value of securities denominated in foreign currencies is converted into U.S.
dollars at the exchange rates in effect at the time of valuation. Any use of a
different rate from the rates used by a Fund's Index may adversely affect such
Fund's ability to track its Index.
FUND SERVICE PROVIDERS
The Bank of New York Mellon Corporation is the administrator, custodian and fund
accounting and transfer agent for the Funds. Chapman and Cutler LLP, 111 West
Monroe Street, Chicago, Illinois 60603, serves as legal counsel to the Funds.
INDEX PROVIDERS
The Index that a Fund seeks to track is compiled by the applicable Index
Provider. The Index Provider is not affiliated with the Funds or First Trust. A
Fund is entitled to use the applicable Index pursuant to a sublicensing
arrangement with First Trust, which in turn has a licensing agreement with each
Index Provider. With the exception of the First Trust Value Line(R) 100
Exchange-Traded Fund, First Trust Value Line(R) Dividend Index Fund and First
Trust Value Line(R) Equity Allocation Index Fund, each Index Provider or its
agent also serves as calculation agent for the applicable Index (each, an "Index
Calculation Agent"). NYSE Arca has assumed the role of Index Calculation Agent
for each of First Trust Value Line(R) 100 Exchange-Traded Fund, First Trust
Value Line(R) Dividend Index Fund and First Trust Value Line(R) Equity
Allocation Index Fund and their applicable Indices. Each Index Calculation Agent
is responsible for the management of the day-to-day operations of the applicable
Index, including calculating the value of such Index every 15 seconds, widely
disseminating the Index values every 15 seconds and tracking corporate actions
resulting in Index adjustments.
DISCLAIMERS
First Trust does not guarantee the accuracy and/or the completeness of the
Indices or any data included therein, and First Trust shall have no liability
for any errors, omissions or interruptions therein. First Trust makes no
warranty, express or implied, as to results to be obtained by the Funds, owners
of the shares of the Funds or any other person or entity from the use of the
Indices or any data included therein. First Trust makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or fitness
for a particular purpose or use with respect to the Indices or any data included
therein. Without limiting any of the foregoing, in no event shall First Trust
have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits) arising out of matters relating to the use of
the Indices, even if notified of the possibility of such damages.
FIRST TRUST CAPITAL STRENGTH ETF
The Fund is not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group,
Inc. ("NASDAQ OMX") or its affiliates (NASDAQ OMX with its affiliates are
referred to as the "Corporations"). The Corporations have not passed on the
legality or suitability of, or the accuracy or adequacy of descriptions and
disclosures relating to, the Fund. The Corporations make no representation or
warranty, express or implied, to the owners of the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly, or the ability of The Capital Strength Index(TM) to track
general stock market performance. The Corporations' only relationship to First
Trust with respect to the Fund is in the licensing of The Capital Strength
Index(TM), and certain trade names of the Corporations and the use of The
Capital Strength Index(TM), which are determined, composed and calculated by
NASDAQ OMX without regard to First Trust or the Fund. NASDAQ OMX has no
obligation to take the needs of First Trust or the owners of the Fund into
consideration in determining, composing or calculating The Capital Strength
Index(TM). The Corporations are not responsible for and have not participated in
the determination of the timing of, prices at, or quantities of Fund Shares to
be issued or in the determination or calculation of the equation by which Fund
Shares are to be converted into cash. The Corporations have no liability in
connection with the administration, marketing or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE CAPITAL STRENGTH INDEX(TM) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS
MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
OWNERS OF THE PRODUCT(S) OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
CAPITAL STRENGTH INDEX(TM) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE
NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
91
CAPITAL STRENGTH INDEX(TM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL
DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND
S&P(R) and S&P 500(R) are registered trademarks of Standard & Poor's Financial
Services LLC ("SPFS"); and CBOE(R), Chicago Board Options Exchange(R), CBOE
Volatility Index(R) and VIX(R) are registered trademarks of Chicago Board
Options Exchange, Incorporated ("CBOE"); and these trademarks have been licensed
for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by
First Trust.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P DOW JONES INDICES
LLC, SPFS, THEIR RESPECTIVE AFFILIATES (COLLECTIVELY, "S&P") OR BY CHICAGO BOARD
OPTIONS EXCHANGE AND ITS AFFILIATES ("CBOE"). S&P AND CBOE MAKE NO
REPRESENTATION, CONDITION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE
FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE CBOE VIX
TAIL HEDGE (THE "INDEX") TO TRACK THE PERFORMANCE OF CERTAIN FINANCIAL MARKETS
AND/OR SECTIONS THEREOF AND/OR OF GROUPS OF ASSETS OR ASSET CLASSES. S&P'S ONLY
RELATIONSHIP TO FIRST TRUST ADVISORS L.P. ("LICENSEE") IS IN THE LICENSING OF
THE CERTAIN TRADEMARKS AND TRADE NAMES AND THE INDEX, WHICH IS DETERMINED,
COMPOSED AND CALCULATED BY CBOE WITHOUT REGARD TO THE LICENSEE OR THE FUND. S&P
AND CBOE HAVE NO OBLIGATION TO TAKE THE NEEDS OF FIRST TRUST OR THE OWNERS OF
THE FUND INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE INDEX.
S&P AND CBOE ARE NOT RESPONSIBLE FOR AND HAVE NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE
OR SALE OF THE FUND OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY
WHICH THE FUND SHARES ARE TO BE CONVERTED INTO CASH. S&P AND CBOE HAVE NO
OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR
TRADING OF THE FUND. THERE IS NO ASSURANCE THAT INVESTMENT PRODUCTS BASED ON THE
INDEX WILL ACCURATELY TRACK INDEX PERFORMANCE OR PROVIDE POSITIVE INVESTMENT
RETURNS. S&P DOW JONES INDICES LLC IS NOT AN INVESTMENT ADVISOR. INCLUSION OF A
SECURITY WITHIN AN INDEX IS NOT A RECOMMENDATION BY S&P OR CBOE TO BUY, SELL OR
HOLD SUCH SECURITY, NOR IS IT CONSIDERED TO BE INVESTMENT ADVICE.
S&P AND CBOE DO NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE
COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR ANY COMMUNICATION,
INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING
ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P AND CBOE SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, DELAYS OR INTERRUPTIONS THEREIN. S&P AND
CBOE MAKE NO WARRANTY, CONDITION OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. S&P AND CBOE MAKE
NO EXPRESS OR IMPLIED WARRANTIES, REPRESENTATIONS OR CONDITIONS, AND EXPRESSLY
DISCLAIM ALL WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE AND ANY OTHER EXPRESS OR IMPLIED WARRANTY OR CONDITION
WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL S&P OR CBOE HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) RESULTING
FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR
OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR
ARRANGEMENTS BETWEEN S&P AND FIRST TRUST, OTHER THAN THE LICENSORS OF S&P.
FIRST TRUST DOW JONES INTERNET INDEX FUND
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND
The "Dow Jones Internet Composite Index(SM)" and "Dow Jones Select MicroCap
Index(SM)" are products of S&P Dow Jones Indices LLC ("SPDJI"), and have been
licensed for use by First Trust. Dow Jones(R), Dow Jones Internet Composite
Index and Dow Jones Select MicroCap Index are trademarks of Dow Jones Trademark
Holdings LLC ("Dow Jones"). The foregoing marks have been licensed to SPDJI and
have been sublicensed for use for certain purposes by First Trust on behalf of
the Funds. The First Trust Dow Jones Internet Index Fund and First Trust Dow
Jones Select MicroCap Index Fund are not sponsored, endorsed, sold or promoted
by SPDJI, Dow Jones or their respective affiliates. SPDJI, Dow Jones and their
respective affiliates make no representation or warranty, express or implied, to
the owners of the First Trust Dow Jones Internet Index Fund and First Trust Dow
Jones Select MicroCap Index Fund or any member of the public regarding the
advisability of investing in securities generally or in the First Trust Dow
Jones Internet Index Fund and First Trust Dow Jones Select MicroCap Index Fund
particularly. The only relationship of SPDJI, Dow Jones or any of their
respective affiliates to the Licensee with respect to the Indexes is the
licensing of certain trademarks, trade names and service marks and of the Dow
92
Jones Internet Composite Index and Dow Jones Select MicroCap Index which are
determined, composed and calculated by SPDJI without regard to First Trust,
First Trust Dow Jones Internet Index Fund or First Trust Dow Jones Select
MicroCap Index Fund. SPDJI and Dow Jones have no obligation to take the needs of
First Trust or the owners of the First Trust Dow Jones Internet Index Fund or
First Trust Dow Jones Select MicroCap Index Fund into consideration in
determining, composing or calculating the Dow Jones Internet Composite Index and
Dow Jones Select MicroCap Index. SPDJI, Dow Jones and their respective
affiliates are not responsible for and have not participated in the
determination of the timing of, prices at, or quantities of the First Trust Dow
Jones Internet Index Fund or First Trust Dow Jones Select MicroCap Index Fund to
be issued or in the determination or calculation of the equation by which the
First Trust Dow Jones Internet Index Fund or First Trust Dow Jones Select
MicroCap Index Fund are to be converted into cash. SPDJI, Dow Jones and their
respective affiliates have no obligation or liability in connection with the
administration, marketing or trading of the First Trust Dow Jones Internet Index
Fund or First Trust Dow Jones Select MicroCap Index Fund. There is no assurance
that investment products based on the Dow Jones Internet Composite Index and the
Dow Jones Select MicroCap Index will accurately track index performance or
provide positive investment returns. SPDJI is not an investment advisor.
Inclusion of a security within an index is not a recommendation by SPDJI to buy,
sell or hold such security, nor is it considered to be investment advice.
SPDJI, DOW JONES AND THEIR RESPECTIVE AFFILIATES DO NOT GUARANTEE THE ACCURACY
AND/OR THE COMPLETENESS OF THE DOW JONES INTERNET COMPOSITE INDEX AND DOW JONES
SELECT MICROCAP INDEX OR ANY DATA INCLUDED THEREIN AND SPDJI, DOW JONES AND
THEIR RESPECTIVE AFFILIATES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS,
OR INTERRUPTIONS THEREIN. SPDJI, DOW JONES AND THEIR RESPECTIVE AFFILIATES MAKE
NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST,
OWNERS OF THE FIRST TRUST DOW JONES INTERNET INDEX FUND OR FIRST TRUST DOW JONES
SELECT MICROCAP INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
DOW JONES INTERNET COMPOSITE INDEX AND DOW JONES SELECT MICROCAP INDEX OR ANY
DATA INCLUDED THEREIN. SPDJI, DOW JONES AND THEIR RESPECTIVE AFFILIATES MAKE NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
DOW JONES INTERNET COMPOSITE INDEX AND DOW JONES SELECT MICROCAP INDEX OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
SPDJI, DOW JONES OR THEIR RESPECTIVE AFFILIATES HAVE ANY LIABILITY FOR ANY LOST
PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN
IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT,
STRICT LIABILITY OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY
AGREEMENTS OR ARRANGEMENTS BETWEEN SPDJI AND FIRST TRUST, OTHER THAN THE
LICENSORS OF SPDJI.
FIRST TRUST ISE CHINDIA INDEX FUND
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND
FIRST TRUST ISE WATER INDEX FUND
The Funds are not sponsored, endorsed, sold or promoted by International
Securities Exchange, LLC, as Index Provider. The Index Provider makes no
representation or warranty, express or implied, to the owners of the Funds or
any member of the public regarding the advisability of trading in the Funds. The
Index Provider's only relationship to First Trust is the licensing of certain
trademarks and trade names of the Index Provider and of the Indexes which are
determined, composed and calculated by the Index Provider without regard to
First Trust or the Funds. The Index Provider has no obligation to take the needs
of First Trust or the owners of the Funds into consideration in determining,
composing or calculating the Indexes. The Index Provider is not responsible for
and has not participated in the determination of the timing of, prices at, or
quantities of the Funds to be listed or in the determination or calculation of
the equation by which the Funds are to be converted into cash. The Index
Provider has no obligation or liability in connection with the administration,
marketing or trading of the Funds.
THE INDEX PROVIDER DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE INDEXES OR ANY DATA INCLUDED THEREIN AND THE INDEX PROVIDER SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. THE INDEX PROVIDER
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST
TRUST, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
INDEXES OR ANY DATA INCLUDED THEREIN. THE INDEX PROVIDER MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEXES OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
THE INDEX PROVIDER HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT,
PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN THE INDEX PROVIDER AND
FIRST TRUST.
93
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND
MORNINGSTAR, INC. ("MORNINGSTAR"), DOES NOT GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE MORNINGSTAR(R) DIVIDEND LEADERS INDEX(SM) OR ANY DATA
INCLUDED THEREIN AND MORNINGSTAR SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS OR INTERRUPTIONS THEREIN. MORNINGSTAR MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST, OWNERS OR USERS OF THE
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE MORNINGSTAR(R) DIVIDEND LEADERS INDEX(SM) OR ANY DATA
INCLUDED THEREIN. MORNINGSTAR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE MORNINGSTAR(R) DIVIDEND -LEADERS
INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL MORNINGSTAR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
First Trust Morningstar Dividend Leaders Index Fund is not sponsored, endorsed,
sold or promoted by Morningstar Inc. Morningstar makes no representation or
warranty, express or implied, to the owners of the First Trust Morningstar
Dividend Leaders Index Fund or any member of the public regarding the
advisability of investing in securities generally or in the First Trust
Morningstar Dividend Leaders Index Fund in particular or the ability of the
Morningstar Dividend Leaders Index(SM) to track general stock market
performance. Morningstar's only relationship to First Trust is the licensing of:
(i) certain service marks and service names of Morningstar; and (ii) the
Morningstar Dividend Leaders Index(SM) which is determined, composed and
calculated by Morningstar without regard to First Trust or the First Trust
Morningstar Dividend Leaders Index Fund. Morningstar has no obligation to take
the needs of First Trust or the owners of First Trust Morningstar Dividend
Leaders Index Fund into consideration in determining, composing or calculating
the Morningstar Dividend Leaders Index(SM). Morningstar is not responsible for
and has not participated in the determination of the prices and amount of the
First Trust Morningstar Dividend Leaders Index Fund or the timing of the
issuance or sale of the First Trust Morningstar Dividend Leaders Index Fund or
in the determination or calculation of the equation by which the First Trust
Morningstar Dividend Leaders Index Fund is converted into cash. Morningstar has
no obligation or liability in connection with the administration, marketing or
trading of the First Trust Morningstar Dividend Leaders Index Fund.
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND
The Funds are not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group,
Inc. ("NASDAQ OMX") or its affiliates (NASDAQ OMX with its affiliates are
referred to as the "Corporations"). The Corporations have not passed on the
legality or suitability of, or the accuracy or adequacy of descriptions and
disclosures relating to, the Funds. The Corporations make no representation or
warranty, express or implied, to the owners of the Funds or any member of the
public regarding the advisability of investing in securities generally or in the
Funds particularly, or the ability of the NASDAQ-100 Equal Weighted Index(SM),
the NASDAQ-100 Ex-Tech Sector Index(SM) and the NASDAQ-100 Technology Sector
Index(SM) to track general stock market performance. The Corporations' only
relationship to First Trust with respect to the Funds is in the licensing of the
NASDAQ(R), NASDAQ OMX(R), NASDAQ-100(R), NASDAQ-100 Index(R), NASDAQ-100 Equal
Weighted Index(SM), NASDAQ-100 Ex-Tech Sector Index(SM) and NASDAQ-100
Technology Sector Index(SM) trademarks, and certain trade names of the
Corporations and the use of the NASDAQ-100 Equal Weighted Index(SM), NASDAQ-100
Ex-Tech Sector Index(SM) and the NASDAQ-100 Technology Sector Index(SM) which
are determined, composed and calculated by NASDAQ OMX without regard to First
Trust or the Funds. NASDAQ OMX has no obligation to take the needs of First
Trust or the owners of the Funds into consideration in determining, composing or
calculating the NASDAQ-100 Equal Weighted Index(SM), NASDAQ-100 Ex-Tech Sector
Index(SM) or the NASDAQ-100 Technology Sector Index(SM). The Corporations are
not responsible for and have not participated in the determination of the timing
of, prices at, or quantities of Fund shares to be issued or in the determination
or calculation of the equation by which Fund shares are to be converted into
cash. The Corporations have no liability in connection with the administration,
marketing or trading of the Funds.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ-100 EQUAL WEIGHTED INDEX(SM), THE NASDAQ-100 EX-TECH SECTOR
INDEX(SM) AND THE NASDAQ-100 TECHNOLOGY SECTOR INDEX(SM) OR ANY DATA INCLUDED
THEREIN. THE CORPORATIONS MAKE NO -WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT(S) OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE NASDAQ-100 EQUAL WEIGHTED INDEX(SM), THE NASDAQ-100
EX-TECH SECTOR INDEX(SM) AND THE NASDAQ-100 TECHNOLOGY SECTOR INDEX(SM) OR ANY
DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100 EQUAL WEIGHTED
INDEX(SM), THE NASDAQ-100 EX-TECH SECTOR INDEX(SM) AND THE NASDAQ-100 TECHNOLOGY
SECTOR INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
94
FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST
PROFITS OR SPECIAL, -INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES,
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND
The Fund is not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group,
Inc. ("NASDAQ OMX"), American Bankers Association ("ABA") or their affiliates
(NASDAQ OMX and ABA, collectively with their affiliates, are referred to as the
"Corporations"). The Corporations have not passed on the legality or suitability
of, or the accuracy or adequacy of descriptions and disclosures relating to, the
Fund. The Corporations make no representation or warranty, express or implied to
the owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly, or the ability of
the NASDAQ OMX(R) ABA Community Bank Index(SM) to track general stock market
performance. The Corporations' only relationship to First Trust Advisors L.P.
("Licensee") is in the licensing of the NASDAQ(R), OMX(R), NASDAQ OMX(R),
American Bankers Association, ABA, and NASDAQ OMX(R) ABA Community Bank
Index(SM) trademarks, and certain trade names and service marks of the
Corporations and the use of the NASDAQ OMX ABA Community Bank Index(SM) which is
determined and composed by the Corporations without regard to Licensee or the
Fund. The Corporations have no obligation to take the needs of the Licensee or
the owners of the Fund into consideration in determining, composing or
calculating the NASDAQ OMX(R) ABA Community Bank Index(SM). The Corporations are
not responsible for and have not participated in the determination of the timing
of, prices at, or quantities of the Fund to be issued or in the determination or
calculation of the equation by which the Fund is to be converted into cash. The
Corporations have no liability in connection with the administration, marketing
or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ OMX ABA COMMUNITY BANK INDEX OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE
OBTAINED BY FIRST TRUST OR THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE NASDAQ OMX ABA COMMUNITY BANK INDEX(SM) OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
NASDAQ OMX ABA COMMUNITY BANK INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY
LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
All price history data for the NASDAQ OMX(R) ABA Community Bank Index(SM) prior
to its dissemination date, June 8, 2009 is indicative and NASDAQ OMX(R) makes no
guarantee of the accuracy of back-tested data.
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND
The Fund is not sponsored, endorsed, sold or promoted by NASDAQ(R), Clean
Edge(R) or their affiliates (NASDAQ(R) and Clean Edge(R), collectively with
their affiliates, are referred to herein as the "Corporations"). The
Corporations have not passed on the legality or suitability of, or the accuracy
or adequacy of descriptions and disclosures relating to, the Fund. The
Corporations make no representation or warranty, express or implied to the
owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly, or the ability of
the NASDAQ(R) Clean Edge(R) Green Energy Index(SM) to track general stock market
or sector performance. The Corporations' relationship to First Trust, with
respect to the Fund, consists of: (i) the licensing of certain indexes, trade
names, trademarks, and service marks and other proprietary data; (ii) the
listing and trading of certain exchange-traded funds; and (iii) the calculating
of intra-day portfolio values for the Fund's shares. The Corporations neither
recommend nor endorse any investment in the Index or the Fund based thereon. The
Corporations are not responsible for and have not participated in the
determination of the timing of, prices at, or quantities of the Fund to be
issued or in the determination or calculation of the equation by which the Fund
is to be converted into cash. The Corporations have no liability in connection
with the administration, marketing or trading of the Fund. Neither the Index nor
the Fund should be construed as investment advice by the Corporations.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX(SM) OR ANY DATA INCLUDED
THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO
BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX(SM) OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY
INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
95
NASDAQ(R) and Clean Edge(R) are not affiliates, but jointly own the Index and
have cross-licensed to one another the rights in their respective marks in
connection with the Index.
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND
The NYSE Arca Biotechnology Index(SM) is a trademark of NYSE Euronext or its
affiliates and is licensed for use by First Trust Advisors L.P. The Fund is not
sponsored or endorsed by NYSE Euronext. NYSE Euronext makes no representation or
warranty, express or implied, to the owners of the Fund or any member of the
public regarding the advisability of investing in the Fund or the ability of the
Fund to track the performance of the various sectors represented in the stock
market. NYSE Euronext has no obligation to take the needs of the owners of the
Fund into consideration in determining, composing or calculating the Index. NYSE
Euronext is not responsible for and has not participated in any determination or
calculation made with respect to the issuance or redemption of shares of the
Fund.
NYSE EURONEXT DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEX OR ANY DATA INCLUDED THEREIN. NYSE EURONEXT MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST, OWNERS OF THE FUND OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NYSE
EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH
RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
FIRST TRUST S&P REIT INDEX FUND
The S&P United States REIT Index is a product of S&P Dow Jones Indices LLC
("SPDJI"). Standard & Poor's(R) and S&P(R) are registered trademarks of Standard
& Poor's Financial Services LLC ("SPFS"). The foregoing marks have been licensed
for use by SPDJI and sublicensed by First Trust Advisors L.P. The First Trust
S&P REIT Index Fund is not sponsored, endorsed, sold or promoted by SPDJI or its
affiliates, and SPDJI and its affiliates make no representation, warranty or
condition regarding the advisability of buying, selling or holding shares of the
Fund.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY SPDJI, SPFS AND/OR ITS
AFFILIATES (COLLECTIVELY, "SPDJI"). SPDJI DOES NOT MAKE ANY REPRESENTATION,
CONDITION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE FUND OR ANY
MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES
GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE S&P UNITED STATES
REIT INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. SPDJI'S ONLY RELATIONSHIP
TO FIRST TRUST ADVISORS L.P. ("FTA") IS THE LICENSING OF CERTAIN TRADEMARKS AND
TRADE NAMES AND OF THE S&P UNITED STATES REIT INDEX WHICH IS DETERMINED,
COMPOSED AND CALCULATED BY SPDJI WITHOUT REGARD TO FTA OR THE FUND. SPDJI HAS NO
OBLIGATION TO TAKE THE NEEDS OF FTA OR THE OWNERS OF THE FUND INTO CONSIDERATION
IN DETERMINING, COMPOSING OR CALCULATING THE S&P UNITED STATES REIT INDEX. SPDJI
IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE
PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE OR SALE OF THE FUND
OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE FUND SHARES
ARE TO BE CONVERTED INTO CASH. SPDJI HAS NO OBLIGATION OR LIABILITY IN
CONNECTION WITH THE ADMINISTRATION, MARKETING, OR TRADING OF THE FUND. THERE IS
NO ASSURANCE THAT INVESTMENT PRODUCTS BASED ON THE S&P UNITED STATES REIT INDEX
WILL ACCURATELY TRACK INDEX PERFORMANCE OR PROVIDE POSITIVE INVESTMENT RETURNS.
S&P DOW JONES INDICES LLC IS NOT AN INVESTMENT ADVISOR. INCLUSION OF A SECURITY
WITHIN AN INDEX IS NOT A RECOMMENDATION BY SPDJI TO BUY, SELL, OR HOLD SUCH
SECURITY, NOR IS IT CONSIDERED TO BE INVESTMENT ADVICE.
SPDJI DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P UNITED
STATES REIT INDEX OR ANY DATA INCLUDED THEREIN AND SPDJI SHALL HAVE NO LIABILITY
FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. SPDJI MAKES NO WARRANTY,
CONDITION OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
FTA, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF S&P
UNITED STATES REIT INDEX OR ANY DATA INCLUDED THEREIN. SPDJI MAKES NO EXPRESS OR
IMPLIED WARRANTIES, REPRESENTATIONS OR CONDITIONS, AND EXPRESSLY DISCLAIM ALL
WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE AND ANY OTHER EXPRESS OR IMPLIED WARRANTY OR CONDITION WITH RESPECT TO
THE S&P UNITED STATES REIT INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL SPDJI HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS)
RESULTING FROM THE USE OF THE S&P UNITED STATES REIT INDEX OR ANY DATA INCLUDED
THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN
CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE. THERE ARE NO THIRD PARTY
96
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN SPDJI AND FIRST TRUST,
OTHER THAN THE LICENSORS OF SPDJI.
FIRST TRUST US IPO INDEX FUND
The Fund is not sponsored, endorsed, sold or promoted by IPOX(R). IPOX(R) makes
no representation or warranty, express or implied, to the owners of the Fund or
any member of the public regarding the advisability of trading in the Fund.
IPOX(R)'s only relationship to First Trust is the licensing of certain
trademarks and trade names of IPOX(R) and of the U.S. IPOX(R) 100 Index, which
is determined, composed and calculated by IPOX(R) without regard to First Trust
or the Fund.
IPOX(R) IS A REGISTERED INTERNATIONAL TRADEMARK OF IPOX(R) SCHUSTER LLC AND
IPOX(R) SCHUSTER, IPOX(R)-100 AND IPOX(R)-30 ARE TRADEMARKS AND SERVICE MARKS OF
IPOX(R) SCHUSTER LLC (WWW.IPOXSCHUSTER.COM) AND HAVE BEEN LICENSED FOR CERTAIN
PURPOSES FROM IPOX(R) SCHUSTER LLC TO FIRST TRUST PURSUANT TO THE PRODUCT
LICENSE AGREEMENT.
A patent with respect to the IPOX(R) index methodology has been issued (U.S.
Pat. No. 7,698,197). IPOX(R) is a registered international trademark of IPOX(R)
Schuster LLC (www.ipoxschuster.com).
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND
VALUE LINE PUBLISHING LLC'S ("VLP") ONLY RELATIONSHIP TO FIRST TRUST IS VLP'S
LICENSING TO FIRST TRUST OF CERTAIN VLP TRADEMARKS AND TRADE NAMES AND THE VALUE
LINE(R) 100 INDEX, THE VALUE LINE(R) DIVIDEND INDEX AND THE VALUE LINE(R) EQUITY
ALLOCATION INDEX (THE "INDEXES"), WHICH ARE COMPOSED BY VLP WITHOUT REGARD TO
FIRST TRUST, THE FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND, THE FIRST
TRUST VALUE LINE(R) DIVIDEND INDEX FUND AND THE FIRST TRUST VALUE LINE(R) EQUITY
ALLOCATION INDEX FUND (THE "PRODUCTS") OR ANY INVESTOR. VLP HAS NO OBLIGATION TO
TAKE THE NEEDS OF FIRST TRUST OR ANY INVESTOR IN THE PRODUCTS INTO CONSIDERATION
IN COMPOSING THE INDEXES. THE PRODUCTS' RESULTS MAY DIFFER FROM THE HYPOTHETICAL
OR PUBLISHED RESULTS OF THE INDEXES. VLP IS NOT RESPONSIBLE FOR HOW FIRST TRUST
MAKES USE OF INFORMATION SUPPLIED BY VLP. VLP IS NOT RESPONSIBLE FOR AND HAS NOT
PARTICIPATED IN THE DETERMINATION OF THE PRICES AND COMPOSITION OF THE PRODUCTS
OR THE TIMING OF THE ISSUANCE FOR SALE OF THE PRODUCTS OR IN THE CALCULATION OF
THE EQUATIONS BY WHICH THE PRODUCTS ARE TO BE CONVERTED INTO CASH. VLP MAKES NO
WARRANTY CONCERNING THE INDEXES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR ANY PERSON'S INVESTMENT PORTFOLIO, OR ANY IMPLIED WARRANTIES ARISING
FROM USAGE OF TRADE, COURSE OF DEALING OR COURSE OF PERFORMANCE, AND VLP MAKES
NO WARRANTY AS TO THE POTENTIAL PROFITS OR ANY OTHER BENEFITS THAT MAY BE
ACHIEVED BY USING THE INDEXES OR ANY INFORMATION OR MATERIALS GENERATED
THEREFROM. VLP DOES NOT WARRANT THAT THE INDEXES WILL MEET ANY REQUIREMENTS OR
BE ACCURATE OR ERROR-FREE. VLP ALSO DOES NOT GUARANTEE ANY USES, INFORMATION,
DATA OR OTHER RESULTS GENERATED FROM THE INDEXES OR PRODUCTS. VLP HAS NO
OBLIGATION OR LIABILITY (I) IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR
TRADING OF THE PRODUCTS; OR (II) FOR ANY LOSS, DAMAGE, COST OR EXPENSE SUFFERED
OR INCURRED BY ANY INVESTOR OR OTHER PERSON OR ENTITY IN CONNECTION WITH THESE
PRODUCTS, AND IN NO EVENT SHALL VLP BE LIABLE FOR ANY LOST PROFITS OR OTHER
CONSEQUENTIAL, SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR EXEMPLARY DAMAGES IN
CONNECTION WITH THE INDEXES OR THE PRODUCTS.
VALUE LINE IS A REGISTERED TRADEMARK OF VALUE LINE, INC. THAT IS LICENSED TO
FIRST TRUST. THE PRODUCTS ARE NOT SPONSORED, RECOMMENDED, SOLD OR PROMOTED BY
VALUE LINE PUBLISHING LLC, VALUE LINE, INC. OR ANY OF THEIR AFFILIATES. FIRST
TRUST IS NOT AFFILIATED WITH ANY VALUE LINE COMPANY.
INDEX INFORMATION
FIRST TRUST CAPITAL STRENGTH ETF
Stocks are selected for inclusion in the Index in the following manner:
The Index Provider begins with the largest 500 U.S. companies included the
NASDAQ US Benchmark Index and excludes the following: companies with less than
$1 billion in cash and short term investments; companies with long-term debt
divided by market capitalization greater than 30%; and companies with return on
equity less than 15%. The Index Provider then ranks all remaining stocks in the
universe by one-year and three-month daily volatility (one-year and three-month
97
daily volatility factors are equally weighted), and selects the top 50
companies, subject to a maximum weight of 30% from any one of the ten Industry
Classification Benchmark industries. The stocks in the Index are equally
weighted initially and on each reconstituting and rebalancing effective date.
The Index is reconstituted and rebalanced on a quarterly basis.
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND
The Index is designed to track the performance of an S&P 500 stock portfolio
(with dividends reinvested), and out-of-the-money call options on the VIX Index.
The amount of the Index allocated to call options on the VIX Index is
reevaluated and rebalanced each month, depending on the level of forward
expected volatility in the S&P 500, as measured by the closest to maturity VIX
Index futures. The Index is calculated as described below.
The VIX Index estimates the market's 30-day expected volatility on the S&P 500
by averaging the weighted prices of S&P 500 put and call options over a wide
range of strike prices. The VIX Index is comprised of options rather than
stocks, with the price of each option reflecting the market's expectation of
future volatility. Like conventional stock indexes, the VIX Index employs rules
for selecting component options and a formula to calculate index values.
INDEX CALCULATION
The Index consists of:
o each of the equity securities in the S&P 500 (with dividends
reinvested); and
o an amount (0-1% of the Index portfolio) of one-month call options on
the VIX Index, as determined below:
o Each month, on the day of the expiration of the options
currently included in the Index, previously purchased options
that are part of the Index are cash-settled and new options
are purchased by the Index at the 10:00 am Central Time asking
price. The percent of the Index allocated to call options on
the VIX Index depends on the level of forward volatility of
the S&P 500 at the next call expiration as measured by the
opening price of VIX Index futures with the same expiration as
the call options as follows:
o VIX Index futures less than or equal to 15, no call
options on the VIX Index are purchased;
o VIX Index futures greater than 15 and less than or equal
to 30, 1% of the portfolio is allocated to call options
on the VIX Index;
o VIX Index futures greater than 30 and less than or equal
to 50, 0.5% of portfolio is allocated to call options on
the VIX Index; and
o VIX Index futures greater than 50, no call options on
the VIX Index are purchased.
Historically, VIX Index futures have ranged in value from 0 to 100. As of the
date of this prospectus, they have never exceeded a value of 100; however,
during periods of sustained extreme volatility, values could exceed 100. Higher
values of VIX Index futures indicate greater expected volatility in the S&P 500.
Historically, deep market declines or "tail" occurrences have occurred more
frequently during intermediate levels of expected volatility (around 30) on the
VIX Index. These declines have rarely occurred at very low or very high levels
of expected volatility; therefore, the Index will not purchase call options on
the VIX Index when VIX Index futures are equal to or less than 15 and greater
than 50.
Based on this methodology, between 99% and 100% of the Index will be comprised
of each equity security in the S&P 500, and between 0% and 1% will be comprised
of call options on the VIX Index.
FIRST TRUST DOW JONES INTERNET INDEX FUND
The Index represents companies that generate the majority of their revenues via
the Internet. The Index was designed and is maintained according to a set of
rules that were devised with the goal of providing clear and accurate views of
the growing Internet market segment. The Index aims to consistently represent
80% of the float-adjusted Internet equity universe. The Index contains two
sub-indexes, the Dow Jones Internet Commerce Index and the Dow Jones Internet
Services Index. For its stock to be eligible for the "universe," a company must
generate at least 50% of annual sales/revenues from the Internet. To be eligible
for inclusion, a stock issued through an initial public offering must have a
minimum of three months' trading history. Spinoffs require this history only if
the parent stock has been trading for less than three months.
An Index-eligible stock must also have:
o Three-month average market capitalization of at least $100 million;
and
o Sufficient trading activity to pass liquidity tests.
98
Index components are selected using an equally-weighted combination of market
capitalization and trading volume (three-month averages for both factors). All
stocks are ranked by float-adjusted market capitalization and then by share
volume. The ranks are then summed in order to determine a company's score.
Companies are then sorted in descending order of score and possible additions or
deletions are determined by a company's position within either the Internet
services sector or the Internet commerce sector.
The Index is weighted by market capitalization, subject to certain limitations.
A stock's market value is limited to no more than 10% of the Index.
Additionally, the aggregate weight of individual securities within the Dow Jones
Internet Composite Index with weights of 4.5% or more is limited to 45% of the
Index. A stock's market value is also limited to 10% of each of the sub-indexes,
the Dow Jones Internet Commerce Index(SM) or the Dow Jones Internet Services
Index(SM). These limitations are reviewed using pricing as of the Thursday prior
to the second Friday of each March, June, September and December, with any
changes taking effect at the close of trading on the third Friday, which means
that it is possible for a stock to exceed a limitation between quarterly review
cycles.
The Index was released by Dow Jones for circulation in February 1999. The
composition of the Index is reviewed by Dow Jones quarterly and additions to or
subtractions from the Index occur on the 3rd Friday of March, June, September
and December, which may impact the relative weightings of the securities in the
Index. Daily historical hypothetical Index values are calculated by Dow Jones
and are available dating back to June 30, 1997. The base value, or initial
value, of the Index was set at 100.00 as of the close of trading on June 30,
1998. The Index is modified capitalization weighted, adjusting for free float
and to meet the following criteria:
o The weight of any individual security is restricted to 10% of the
Dow Jones Internet Composite Index.
o The aggregate weight of individual securities with weights of 4.5%
or more is restricted to 45%.
Currently, the Index consists of 40 common stocks. New components are not
eligible to be displaced from the Index for a period of six months following
their addition, except in cases of the companies being acquired. A
non-component's score must rank 15th or higher in the Internet services sector
and 10th or higher in the Internet commerce sector to be added. In such case,
the lowest-ranking component will be deleted. A component ranking 45th or lower
in the Internet services sector, or 25th or lower in the Internet commerce
sector, will be deleted and replaced with the highest-ranking non-component. Dow
Jones publishes the changes to the Index prior to the effective date of the
change and on such effective date posts the changes on its website at
www.djindexes.com. All replacement companies are selected based on the selection
criteria set forth herein.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that Dow Jones no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND
All stocks traded on the NYSE are ranked by full market capitalization, and then
are divided into deciles containing equal numbers of securities. Deciles nine
and ten are defined as microcaps. All stocks traded on the NYSE, the NYSE MKT
and NASDAQ(R) whose market capitalizations are within or below the microcap
range defined by the NYSE stocks are included in the selection universe.
Currently, the Index composition is determined by selecting stocks from the
universe based on size, trading volume and financial indicators in the following
manner:
1. Eliminate from the selection universe any securities that do not meet all
three of the following criteria:
o Within the top 1,000 stocks by full market capitalization
o Within the top 1,000 stocks by three-month dollar volume
o Within the top 1,500 stocks by one-month dollar volume
2. Exclude stocks that rank within the bottom 20% of the filtered selection
universe based on any one of the following factors:
o Trailing P/E ratio (highest are excluded)
o Trailing price/sales ratio (highest are excluded)
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o Per-share profit change for the previous quarter (lowest are
excluded)
o Operating profit margin (lowest are excluded)
o Six-month total return (lowest are excluded)
Individual securities for which financial ratios or return data are not
available are not subjected to the applicable screens. Accordingly, such
securities will not be excluded from the Index merely because such data is not
available.
The Index was released by Dow Jones for circulation in June 2005. The
composition of the Index is reviewed by Dow Jones annually in August and
additions to or subtractions from the Index occurs following this annual review.
The shares outstanding and float factors are reconsidered by Dow Jones quarterly
in March, June, September and December which may impact the relative weightings
of the securities in the Index. Daily historical hypothetical Index values are
calculated by Dow Jones and are available dating back to August 31, 1992. The
base value, or initial value, of the Index was set at 100.00 as of that date.
The Index is weighted based on float-adjusted market capitalization dating back
to May 3, 2004. Prior to that date, the Index is weighted based on full market
capitalization. Float-adjusted capitalization reflects what Dow Jones believes
to be the outstanding shares minus non-publicly held shares multiplied by the
market price. Full market capitalization represents the outstanding shares
multiplied by the market price. Dow Jones believes that the change to the use of
a float-adjusted capitalization, rather than full market capitalization,
provides a better way to measure a company's impact on the markets. So as a
result, companies with fewer publicly offered shares will have a smaller
weighting in the Index.
Currently, the Index will consist of a maximum of 1,000 common stocks, less the
stocks within the bottom 20% of the filtered selection universe based on any one
of the five factors listed above.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that Dow Jones no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST ISE CHINDIA INDEX FUND
This Index is constructed in the following manner:
1. Establish the universe of companies that are domiciled in either
India or China and whose ADRs, ADSs and/or stocks are listed on a
U.S. securities exchange.
2. Remove companies that do not meet the Component Eligibility
Requirements (as defined below).
3. If a company has multiple share classes, include the most liquid
issue for that company and remove the remaining classes.
4. Rank the stocks in descending order by unadjusted market
capitalization. Assign a numerical score to each stock based on its
rank (e.g., first stock gets a "1").
5. Rank the stocks in descending order by the average daily value of
shares traded for the past three months. Assign a numerical score to
each stock based on its rank.
6. Determine the "combined liquidity score" of each stock by adding the
scores assigned during each ranking process above.
7. Within each country, rank the stocks by its "combined liquidity
score."
8. Select the top 25 stocks within each country by liquidity score. If
less than 25 stocks are available for a country, then continue
selecting stocks from the other country until a maximum of 50 stocks
are selected.
9. Weight the stocks according to the following methodology:
a. Top three rank stocks in each country are weighted at 7% each;
b. The next three stocks in each country are weighted at 4% each;
c. The next three stocks in each country are weighted at 2% each;
and
d. The remaining stocks are then equally weighted.
100
The Component Eligibility Requirements for the Index are as follows:
1. A candidate must qualify as a "reported security" as defined in Rule
11Aa3-1 under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and its common stock must be listed on the NYSE, the
NYSE MKT or NASDAQ(R).
2. The company must be domiciled in either India or China (excluding
Taiwan).
3. The company must be an operating company. Closed-end funds or
exchange-traded funds are excluded.
4. Each component security has a three-month average daily trading
value of at least $1 million.
5. Each component security has been listed for the last 60 consecutive
days.
6. Each component security has an unadjusted market capitalization of
at least $250 million.
After the initial selection of securities, the Index is rebalanced on the
application of the above model on a semi-annual basis.
The Index is calculated and maintained by S&P Dow Jones Indices LLC ("S&P")
based on a methodology developed by the Index Provider. Companies are added or
removed by the Index Provider based on the methodology determined by the Index
Provider.
The Index is calculated on a price and total return basis. The price component
of the Index is calculated in real-time and disseminated in the Options Price
Reporting Authority and market data window every day the U.S. equity markets are
open. The total return component of the Index is calculated on an end-of-day
basis. Both sets of values are available on ISE's website at www.ise.com.
The Index has been created to provide investors with a performance benchmark of
Chinese or Indian companies whose shares are available to investors in the
United States. It is the intention that products based on the Index will help
investors to quickly gain exposure to those emerging markets in a quick,
affordable and convenient manner.
The Index uses a modified market capitalization-weighted methodology to create a
more uniform weight distribution. This prevents a few large component stocks
from dominating the Index but still promotes portfolio diversification by
retaining the economic attributes of capitalization ranking. Semi-annual reviews
and rebalancing events are used to reset the weighting of each component such
that each component has a proportionate influence on the Index performance.
The Index contains 50 different component stocks. Companies may not apply, and
may not be nominated, for inclusion in the Index. Companies are added or removed
by the Index Provider based on the methodology described herein. Whenever
possible, the Index Provider will publicly announce changes to the Index on its
website at least five trading days in advance of the actual change.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that the Index Provider no longer produces and disseminates the
Index, the Index license is terminated or the identity or character of the Index
is materially changed, the Board will seek to engage a replacement index.
However, if that proves to be impracticable, the Board will take whatever action
it deems to be in the best interests of the Fund. The Board will also take
whatever actions it deems to be in the best interests of the Fund if the shares
are delisted.
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND
The Index begins by establishing the universe of stocks listed in the United
States of companies involved in the natural gas exploration and production
industries and then eliminates stocks whose natural gas proved reserves are less
than 50% of the candidate stock's total proved reserves using Barrels of Oil
Equivalent (BOE), an industry standard calculation, where 1 BOE = 6,000 cubic
feet of gas. From this universe, the Index ranks all the candidate stocks using
four different methods including price/earnings ratio, price/book ratio, return
on equity and the correlation to the closing price of the spot-month Henry Hub
natural gas futures contract traded on the New York Mercantile Exchange. The
Index Provider then averages the rankings and selects the top 30 stocks based on
the final rank. After the initial selection of securities, the Index is
rebalanced on the application of the above model on a quarterly basis.
The Index is calculated and maintained by S&P based on a methodology developed
by the Index Provider. Companies are added or removed by the Index Provider
based on the methodology determined by the Index Provider.
The Index is calculated on a price and total return basis. The price component
of the Index is calculated in real-time and disseminated in the Options Price
Reporting Authority and market data window every day the U.S. equity markets are
101
open. The total return component of the Index is calculated on an end-of-day
basis. Both sets of values are available on the Index Provider's website at
www.ise.com.
The Index is comprised of companies that derive a substantial portion of their
revenues from the exploration and production of natural gas. To be part of the
Index, a company must meet component eligibility requirements. These
requirements include the company being a "reported security" as defined in Rule
11Aa3-1 under the 1934 Act and have its common stock listed on the NYSE, NYSE
Arca, the NYSE MKT or NASDAQ(R). Additionally the company must have a public
float of at least 25% of the stock and must be an operating company.
To meet Index eligibility, the security must also satisfy market capitalization,
liquidity and weighting concentration requirements. Each component security must
have a market capitalization of at least $150 million, with trading volume of at
least one million shares for each of the last six months, except that for each
of the lowest weighted component securities in the Index that in aggregate
account for no more than 10% of the weight of the Index, trading volume must
have been at least 500,000 shares for each of the last six months. Average daily
trading value over the past six months must also have been more than $1 million,
and no single component security can represent more than 24% of the weight of
the Index. The five highest weighted component securities may not in the
aggregate account for more than 50% of the weight of the Index.
Components of the Index are float-adjusted to reflect the number of shares
available to investors according to S&P's proprietary methodology. The
float-adjusted number of shares is used during the component eligibility
process, as described above, at initial component selection and at scheduled
reviews.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that the Index Provider no longer produces and disseminates the
Index, the Index license is terminated or the identity or character of the Index
is materially changed, the Board will seek to engage a replacement index.
However, if that proves to be impracticable, the Board will take whatever action
it deems to be in the best interests of the Fund. The Board will also take
whatever actions it deems to be in the best interests of the Fund if the shares
are delisted.
FIRST TRUST ISE WATER INDEX FUND
The Index begins by ranking all the publicly traded companies in the potable and
wastewater industries by their unadjusted market capitalization. From this
universe, the Index removes the candidate stocks that do not meet the component
eligibility requirements. If a company has multiple share classes, the Index
considers the most liquid issue for inclusion in the Index and removes the
remaining classes. The Index selects the top 36 stocks remaining by market
capitalization. When the Index is initially configured or reconfigured (as noted
below), the Index adjusts the assigned shares of the component stocks such that
the weights conform to the following schedule:
1. Assign a weight of 4.00% to stocks 1-10.
2. Assign a weight of 3.50% to stocks 11-15.
3. Assign a weight of 3.00% to stocks 16-20.
4. Assign a weight of 2.00% to stocks 21-30.
5. Equally distribute weights among remaining stocks.
After the initial selection of securities, the Index is rebalanced on the
application of the above model on a semi-annual basis. The holdings of the Fund
and the composition and compilation methodology of the Index will be available
on the Fund's website at www.ftportfolios.com.
The Index is calculated and maintained by S&P based on a methodology developed
by the Index Provider. Companies are added or removed by the Index Provider
based on the methodology determined by the Index Provider.
The Index is calculated on a price and total return basis. The price component
of the Index is calculated in real-time and disseminated in the Options Price
Reporting Authority and market data window every day the U.S. equity markets are
open. The total return component of the Index is calculated on an end-of-day
basis. Both sets of values are available on the Index Provider's website at
www.ise.com.
The Index is comprised of companies that derive a substantial portion of their
revenues from the potable and wastewater industries. To be part of the Index, a
company must meet component eligibility requirements. These requirements include
the company being a "reported security" as defined in Rule 11Aa3-1 under the
102
1934 Act and have its common stock listed on the NYSE, NYSE Arca, the NYSE MKT
or NASDAQ(R). Additionally the company must have a public float of at least 25%
of the stock and must be an operating company.
To meet Index eligibility, the security must also satisfy market capitalization,
liquidity and weighting concentration requirements. Each component security must
have a market capitalization of at least $100 million, with trading volume of at
least one million shares for each of the last six months, except that for each
of the lowest weighted component securities in the Index that in aggregate
account for no more than 10% of the weight of the Index, trading volume has been
at least 500,000 shares for each of the last six months. The lesser of the five
highest weighted component securities in the index or the highest weighted
component securities in the Index that in aggregate represent at least 30% of
the total number of component securities in the Index each must have had an
average monthly trading volume of at least 2,000,000 shares over the past six
months and no single component security can represent more than 24% of the
weight of the Index. The five highest weighted component securities may not in
the aggregate account for more than 50% of the weight of the Index.
Components of the Index are float-adjusted to reflect the number of shares
available to investors according to S&P's proprietary methodology. The
float-adjusted number of shares is used during the component eligibility
process, as described above, at initial component selection and at scheduled
reviews.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that the Index Provider no longer produces and disseminates the
Index, the Index license is terminated or the identity or character of the Index
is materially changed, the Board will seek to engage a replacement index.
However, if that proves to be impracticable, the Board will take whatever action
it deems to be in the best interests of the Fund. The Board will also take
whatever actions it deems to be in the best interests of the Fund if the shares
are delisted.
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND
The securities selected for the Index are determined by a proprietary screening
model developed by Morningstar. Morningstar has established the investable
universe of the securities that may be included in the Index and Index
eligibility. The investable universe and Index eligibility criteria are applied
in the sequence in which they appear below. Each criterion is applied only to
the "survivors" of the criteria applied previously.
INVESTABLE UNIVERSE
To qualify for inclusion in the investable universe, a security must meet the
following criteria:
1. It must trade on one of the three major exchanges--the NYSE, the
NYSE MKT or NASDAQ(R);
2. The issuing company's country of domicile should be the United
States or the issuing company's primary stock market activities are
carried out in the United States;
3. Securities that have more than 10 non-trading days in the prior
quarter are excluded;
4. The following security types do not qualify:
o ADRs and ADSs
o Fixed-dividend shares
o Convertible notes, warrants and rights
o Tracking stocks
o Limited partnerships and holding companies.
INDEX ELIGIBILITY
To qualify for inclusion in the Index, a security's liquidity score must be
among the top 75% of the companies in the investable universe. A security's
liquidity score is the average of its ranks on each of the following measures:
1. The average monthly trading volume in U.S. dollars during the six
calendar months immediately prior to reconstitution or, in the case
of corporate entities younger than six months, since the security
was first issued (partial month periods are prorated by number of
trading days in the month); and
2. The lowest two months' total trading volume during the six calendar
months immediately prior to reconstitution (the months need not be
sequential).
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Additionally, all eligible securities must meet all of the following criteria:
1. Company dividends are "qualified income;"
2. Company should have a 5-year dividend growth greater than or equal
to 0; and
3. Company should have a coverage ratio greater than 1.0. Coverage
ratio equals the one year forecast of earnings per share for a
security divided by the indicated dividend per share.
After the above criteria are applied, the top 100 stocks by indicated dividend
yield are selected for inclusion in the Index. The higher coverage ratio breaks
all ties. The Index is weighted according to the dividends paid to investors by
each company. Therefore, the available dividend dollar value is the product of
the security's shares outstanding, indicated dividend per share, and free float
factor. Free float factor is the percentage of shares that are readily available
for trading in the market after block ownership and restricted shares are
subtracted from the total number of shares outstanding. Morningstar makes
adjustments to the Index weighting when a single constituent's weighting exceeds
the maximum weight allowed (as established by regulatory or tax limits). In such
instances, the excess weight is distributed among the remaining constituents.
The Index's base market value at inception (June 30, 1997) was 1,000. The Index
values are calculated once a day at the close of business; however, Index values
are not calculated when U.S. exchanges are closed. The Index is
reconstituted--i.e., the Index membership is reset--once annually, on the Monday
following the third Friday of June. If the Monday is a holiday, reconstitution
occurs on the Tuesday immediately following. Reconstitution is carried out after
the day's closing when the Index values have been determined. The Index is
rebalanced--i.e., the number of free float shares and the indicated dividend per
share of each constituent are adjusted--four times annually. Adjustments are
made on the Monday following the third Friday of March, June, September and
December. If the Monday is a holiday, rebalancing occurs on the Tuesday
immediately following. Rebalancing is carried out after the day's closing index
values have been determined. Market data used for rebalancing is from the last
trading day of the first month of each quarter. The Index constituent float
factors and shares outstanding updates are announced at rebalancing. Information
regarding the methodology for calculating the Index is also found on the
Morningstar website (www.morningstar.com).
Companies are removed from the Index primarily due to mergers/acquisitions and
bankruptcies. A component security may also be removed from the Index if it is
no longer trading on the respective stock exchange.
The updated values of the Index are distributed by Dow Jones during trading
hours (8:30 a.m. to 3:15 p.m.) every 15 seconds through its quotation network to
a variety of data vendors. In addition, delayed quotations of the Index are
available on Bloomberg every 15 minutes during regular trading hours.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that Morningstar no longer calculates the Index, the Index license
is terminated or the identity or character of the Index is materially changed,
the Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND
The Index is the equal-weighted version of the NASDAQ-100 Index(R) and
represents the largest non-financial domestic and international securities
listed on NASDAQ(R). The NASDAQ-100 Index(R) is calculated under a modified
capitalization-weighted methodology.
INITIAL ELIGIBILITY CRITERIA
(For the purposes of Index eligibility criteria, if the security is a depositary
receipt representing a security of a non-U.S. issuer, then references to the
"issuer" are references to the issuer of the underlying security.)
To be eligible for initial inclusion in the Index, a security must be listed on
NASDAQ(R) and meet the following criteria:
o the security's U.S. listing must be exclusively on NASDAQ(R) (unless
the security was dually listed on another U.S. market prior to
January 1, 2004 and has continuously maintained such listing);
o the security must be of a non-financial company;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the security must have average daily trading volume of at least
200,000 shares;
104
o if the issuer of the security is organized under the laws of a
jurisdiction outside the United States, then such security must have
listed options on a recognized options market in the United States
or be eligible for listed-options trading on a recognized options
market in the United States;
o only one class of security per issuer is allowed;
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible;
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn;
o the issuer of the security must have "seasoned" on NASDAQ(R) or
another recognized market (generally, a company is considered to be
seasoned if it has been listed on a market for at least two years;
in the case of spin-offs, the operating history of the spin-off will
be considered); and
o if the security would otherwise qualify to be in the top 25% of the
securities included in the Index by market capitalization for the
six prior consecutive month-ends, then a one-year "seasoning"
criterion would apply.
CONTINUED ELIGIBILITY CRITERIA
(For the purposes of Index eligibility criteria, if the security is a depositary
receipt representing a security of a non-U.S. issuer, then references to the
"issuer" are references to the issuer of the underlying security.)
To be eligible for continued inclusion in the Index, the following criteria
apply:
o the security's U.S. listing must be exclusively on NASDAQ(R) (unless
the security was dually listed on another U.S. market prior to
January 1, 2004 and has continuously maintained such listing);
o the security must be of a non-financial company;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the security must have average daily trading volume of at least
200,000 shares (measured annually during the ranking review
process);
o if the issuer of the security is organized under the laws of a
jurisdiction outside the United States, then such security must have
listed options on a recognized options market in the United States
or be eligible for listed-options trading on a recognized options
market in the United States (measured annually during the ranking
review process);
o the security must have an adjusted market capitalization equal to or
exceeding 0.10% of the aggregate adjusted market capitalization of
the Index at each month-end. In the event a company does not meet
this criterion for two consecutive month-ends, it will be removed
from the Index effective after the close of trading on the third
Friday of the following month; and
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn.
In administering the Index, NASDAQ(R) will exercise reasonable discretion as it
deems appropriate.
NASDAQ-100 INDEX(R) RANKING REVIEW
Except under extraordinary circumstances that may result in an interim
evaluation, NASDAQ-100 Index(R) composition is reviewed on an annual basis as
follows (such evaluation is referred to herein as the "Ranking Review").
Securities listed on NASDAQ(R) which meet the applicable eligibility criteria
(above) are ranked by market value. NASDAQ-100 Index(R)-eligible securities
which are already in the NASDAQ-100 Index(R) and which are ranked in the top 100
eligible securities (based on market value) are retained in the NASDAQ-100
Index.(R) A security that is ranked 101 to 125 is also retained, provided that
such security was ranked in the top 100 eligible securities as of the previous
Ranking Review. Securities not meeting such criteria are replaced. The
replacement securities chosen are those NASDAQ-100 Index(R)-eligible securities
not currently in the NASDAQ-100 Index(R) that have the largest market
capitalization. The data used in the ranking includes end of October NASDAQ(R)
market data and is updated for total shares outstanding submitted in a publicly
filed Securities and Exchange Commission document via EDGAR through the end of
November.
Generally, the list of annual additions and deletions is publicly announced via
a press release in the early part of December. Replacements are made effective
after the close of trading on the third Friday in December. Moreover, if at any
time during the year a NASDAQ-100 Index(R) security is determined by NASDAQ(R)
to become ineligible for continued inclusion in the NASDAQ-100 Index(R) based on
the Continued Eligibility Criteria (above), the security will be replaced with
the largest market capitalization security not currently in the NASDAQ-100
Index(R) and meeting the Initial NASDAQ-100 Index(R) eligibility criteria listed
above.
105
In addition to the Ranking Review, the securities in the NASDAQ-100 Index(R) are
monitored every day by NASDAQ(R) with respect to changes in total shares
outstanding arising from secondary offerings, stock repurchases, conversions, or
other corporate actions. NASDAQ(R) has adopted the following weight adjustment
procedures with respect to such changes. Changes in total shares outstanding
arising from stock splits, stock dividends, or spin-offs are generally made to
the NASDAQ-100 Index(R) on the evening prior to the effective date of such
corporate action. If the change in total shares outstanding arising from other
corporate actions is greater than or equal to 5.0%, the change will be made as
soon as practicable, normally within ten (10) days of such action. Otherwise, if
the change in total shares outstanding is less than 5%, then all such changes
are accumulated and made effective at one time on a quarterly basis after the
close of trading on the third Friday in each of March, June, September, and
December.
INDEX CALCULATION
The Index is an equal-weighted index. The value of the Index equals the
aggregate value of the Index share weights, also known as the Index shares, of
each of the Index securities multiplied by each such security's NASDAQ(R)
Official Closing Price ("NOCP"), divided by the divisor. The divisor serves the
purpose of scaling such aggregate index value to a lower order of magnitude
which is more desirable for Index reporting purposes. If trading in an Index
security is halted while the market is open, the last NASDAQ(R) traded price for
that security is used for all index computations until trading resumes. If
trading is halted before the market is open, the previous day's NOCP is used.
The Index began on June 20, 2005 at a base value, or initial value, of 1000.00.
The formula for Index value is as follows:
Aggregate Adjusted Market Value/Divisor
The formula for the Divisor is as follows:
(Market Value after Adjustments/Market Value before Adjustments) X
Divisor before Adjustments
The Index is generally calculated without regard to cash dividends on component
securities.
The Index is calculated using NASDAQ(R) prices (not consolidated) during the day
(from 09:30:15 to 16:01:30) and the NOCP for the close. The Index is
disseminated every 15 seconds from 09:30:15 to 17:16:00 Eastern time through the
NASDAQ Index Dissemination ServicesSM. The closing value of the Index may change
up until 17:15:00 Eastern time due to corrections to the NOCP of the component
securities.
INDEX MAINTENANCE
The Index is rebalanced quarterly such that each security is set at a weight of
1.00% of the Index. Index share changes are not made during the quarter however
changes arising from stock splits and stock dividends are made to the Index on
the evening prior to the effective date of such corporate action. In the case of
spin-offs of component securities, the price of the security will be adjusted
and a corresponding adjustment will be made to the Index shares of the security
such that the weight of the security in the Index will not change. In the case
of a special cash dividend or rights issuance, NASDAQ(R) will determine on an
individual basis whether to make a change to the price of an Index security. If
it is determined that a change will be made, it will become effective on the
ex-date and a corresponding adjustment will be made to the Index shares of the
security such that the weight of the security in the Index will not change. If a
component of the NASDAQ-100 Index(R) changes, the new security will assume the
weight of the removed security on the effective date.
INDEX REBALANCING
The Index is rebalanced quarterly such that each security is initially set at a
weight of 1.00% of the Index at the time of calculation. The quarterly Index
shares are based upon the aggregate capitalization of the Index at the close of
trading on the Tuesday in the week immediately preceding the week of the third
Friday in March, June, September, and December. Changes to the Index shares will
be made effective after the close of trading on the third Friday in March, June,
September and December and an adjustment to the divisor will be made to ensure
continuity of the Index.
In administering the Index, NASDAQ(R) will exercise reasonable discretion as it
deems appropriate. Information regarding the methodology for calculating the
Index is found on the NASDAQ(R) website (https://indexes.nasdaqomx.com/).
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that NASDAQ(R) no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
106
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND
The Index contains the securities of the NASDAQ-100 Index(R) that are not
classified as "technology" according to the ICB classification system. Please
note that whether a company is considered to be "non-technology" for purposes of
being included in the Index will be exclusively determined by NASDAQ(R) without
regard to the Fund. In addition, such classifications may not necessarily be
applicable for the financial statements prepared by the Fund or certain other
purposes. The Index is generally calculated without regard to cash dividends on
component securities. The Index began on February 22, 2006 with a base value, or
initial value, of 1000.00.
NASDAQ-100 INDEX(R) INITIAL ELIGIBILITY CRITERIA
(For the purposes of NASDAQ-100 Index(R) eligibility criteria, if the security
is a depositary receipt representing a security of a non-U.S. issuer, then
references to the "issuer" are references to the issuer of the underlying
security.)
To be eligible for initial inclusion in the NASDAQ-100 Index(R), a security must
be listed on NASDAQ(R) and meet the following criteria:
o the security's U.S. listing must be exclusively on NASDAQ(R) (unless
the security was dually listed on another U.S. market prior to
January 1, 2004 and has continuously maintained such listing);
o the security must be of a non-financial company;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the security must have average daily trading volume of at least
200,000 shares;
o if the issuer of the security is organized under the laws of a
jurisdiction outside the United States, then such security must have
listed options on a recognized options market in the United States
or be eligible for listed-options trading on a recognized options
market in the United States;
o only one class of security per issuer is allowed;
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible;
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn;
o the issuer of the security must have "seasoned" on NASDAQ(R) or
another recognized market (generally, a company is considered to be
seasoned if it has been listed on a market for at least two years;
in the case of spin-offs, the operating history of the spin-off will
be considered); and
o if the security would otherwise qualify to be in the top 25% of the
securities included in the NASDAQ-100 Index(R) by market
capitalization for the six prior consecutive month-ends, then a
one-year "seasoning" criterion would apply.
NASDAQ-100 INDEX(R) CONTINUED ELIGIBILITY CRITERIA
(For the purposes of NASDAQ-100 Index(R) eligibility criteria, if the security
is a depositary receipt representing a security of a non-U.S. issuer, then
references to the "issuer" are references to the issuer of the underlying
security.)
To be eligible for continued inclusion in the NASDAQ-100 Index(R), the following
criteria apply:
o the security's U.S. listing must be exclusively on NASDAQ(R) (unless
the security was dually listed on another U.S. market prior to
January 1, 2004 and has continuously maintained such listing);
o the security must be of a non-financial company;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the security must have average daily trading volume of at least
200,000 shares (measured annually during the ranking review
process);
o if the issuer of the security is organized under the laws of a
jurisdiction outside the United States, then such security must have
listed options on a recognized options market in the United States
or be eligible for listed-options trading on a recognized options
market in the United States (measured annually during the ranking
review process);
o the security must have an adjusted market capitalization equal to or
exceeding 0.10% of the aggregate adjusted market capitalization of
the NASDAQ-100 Index(R) at each month-end. In the event a company
does not meet this criterion for two consecutive month-ends, it will
be removed from the NASDAQ-100 Index(R) effective after the close of
trading on the third Friday of the following month; and
107
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn.
In administering the NASDAQ-100 Index(R), NASDAQ(R) will exercise reasonable
discretion as it deems appropriate.
NASDAQ-100 EX-TECH SECTOR INDEX(SM) ELIGIBILITY
The Index contains securities of the NASDAQ-100 Index(R) not classified as
"technology" according to ICB. The eligibility for the Index is determined in a
two-step process and the security has to meet both criteria in order to become
eligible for the Index.
1. The security must be part of the NASDAQ-100 Index(R), which includes
100 of the largest domestic and international non-financial
securities listed on NASDAQ(R) and is re-ranked annually.
2. The security must not be classified as "technology" according to
ICB.
NASDAQ-100 EX-TECH SECTOR INDEX(SM) MAINTENANCE
The Index is rebalanced quarterly such that each security is set at an equal
weight of the Index. Index share changes are not made during the period. However
changes arising from stock splits, stock dividends are made to the Index on the
evening prior to the effective date of such corporate action. In the case of
spin-offs of component securities, the price of the security will be adjusted
and a corresponding adjustment will be made to the Index shares of the security
such that the weight of the security in the Index will not change.
In the case of a special cash dividend or rights issuance, NASDAQ(R) will
determine on a case-by-case basis whether to make a change to the price and/or
Index components in accordance with its Index dividend policy. If it is
determined that a change will be made, it will become effective on the
ex-dividend date and a corresponding adjustment will be made to the Index shares
of the security such that the weight of the security in the Index will not
change. Component changes to the Index will be handled in the following manner:
1. If a component of the NASDAQ-100 Index(R) that is not classified as
"technology" according to ICB is removed from the NASDAQ-100
Index(R), it will also be removed from the Index and as such if the
replacement security being added to the NASDAQ-100 Index(R) is not
classified as "technology" according to ICB, it will be added to the
Index and will assume the weight of the removed security on the
effective date;
2. If a component of the NASDAQ-100 Index(R) that is classified as
"technology" according to ICB is removed and the replacement
security being added to the NASDAQ-100 Index(R) is not classified as
"technology" according to ICB, the replacement security will be
added to the Index at the next quarterly rebalancing; however, if
the security change is not announced prior to the close of business
of the Tuesday in the week immediately preceding the third Friday,
the security's addition to the Index will be made in the following
quarterly rebalance; and
3. If a component of the NASDAQ-100 Index(R) that is not classified as
"technology" according to ICB is removed from the NASDAQ-100
Index(R) and the replacement security being added to the NASDAQ-100
Index(R) is classified as "technology" according to ICB, the
security will be removed from the Index and the divisor of the Index
will be adjusted to ensure Index continuity.
NASDAQ-100 EX-TECH SECTOR INDEX(SM) REBALANCING
The Index is rebalanced quarterly such that each security is initially set at an
equal weight of the Index at the time of calculation. Equal weights are based
upon the aggregate capitalization of the Index, incorporating quarterly changes
for the NASDAQ-100 Index(R), and the corresponding last sale price of the
security at the close of trading on the Tuesday in the week immediately
preceding the week of the third Friday in March, June, September, and December.
Changes to the Index shares will be made effective after the close of trading on
the third Friday in March, June, September and December.
In administering the Index, NASDAQ(R) will exercise reasonable discretion as it
deems appropriate.
Information regarding the methodology for calculating the Index is also found on
the NASDAQ(R) website (https://indexes.nasdaqomx.com/). The Fund expects to make
changes to its portfolio shortly after changes to the Index are released to the
public via the NASDAQ(R) website. Investors will be able to access the holdings
of the Fund and the composition and compilation methodology of the Index through
the Fund's website at www.ftportfolios.com.
In the event that NASDAQ(R) no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the Fund's shares are delisted.
108
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND
The Index contains the securities of the NASDAQ-100 Index(R) that are classified
as "technology" according to the ICB classification system.
NASDAQ-100 INDEX(R) INITIAL ELIGIBILITY CRITERIA
(For the purposes of NASDAQ-100 Index(R) eligibility criteria, if the security
is a depositary receipt representing a security of a non-U.S. issuer, then
references to the "issuer" are references to the issuer of the underlying
security.)
To be eligible for initial inclusion in the NASDAQ-100 Index(R), a security must
be listed on NASDAQ(R) and meet the following criteria:
o the security's U.S. listing must be exclusively on NASDAQ(R) (unless
the security was dually listed on another U.S. market prior to
January 1, 2004 and has continuously maintained such listing);
o the security must be of a non-financial company;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the security must have average daily trading volume of at least
200,000 shares;
o if the issuer of the security is organized under the laws of a
jurisdiction outside the United States, then such security must have
listed options on a recognized options market in the United States
or be eligible for listed-options trading on a recognized options
market in the United States;
o only one class of security per issuer is allowed;
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible;
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn;
o the issuer of the security must have "seasoned" on NASDAQ(R) or
another recognized market (generally, a company is considered to be
seasoned if it has been listed on a market for at least two years;
in the case of spin-offs, the operating history of the spin-off will
be considered); and
o if the security would otherwise qualify to be in the top 25% of the
securities included in the NASDAQ-100 Index(R) by market
capitalization for the six prior consecutive month-ends, then a
one-year "seasoning" criterion would apply.
NASDAQ-100 INDEX(R) CONTINUED ELIGIBILITY CRITERIA
(For the purposes of NASDAQ-100 Index(R) eligibility criteria, if the security
is a depositary receipt representing a security of a non-U.S. issuer, then
references to the "issuer" are references to the issuer of the underlying
security.)
To be eligible for continued inclusion in the NASDAQ-100 Index(R), the following
criteria apply:
o the security's U.S. listing must be exclusively on NASDAQ(R) (unless
the security was dually listed on another U.S. market prior to
January 1, 2004 and has continuously maintained such listing);
o the security must be of a non-financial company;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the security must have average daily trading volume of at least
200,000 shares (measured annually during the ranking review
process);
o if the issuer of the security is organized under the laws of a
jurisdiction outside the United States, then such security must have
listed options on a recognized options market in the United States
or be eligible for listed-options trading on a recognized options
market in the United States (measured annually during the ranking
review process);
o the security must have an adjusted market capitalization equal to or
exceeding 0.10% of the aggregate adjusted market capitalization of
the NASDAQ-100 Index(R) at each month-end. In the event a company
does not meet this criterion for two consecutive month-ends, it will
be removed from the NASDAQ-100 Index(R) effective after the close of
trading on the third Friday of the following month; and
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn.
109
INDEX CALCULATION
The Index is an equal-weighted index. The value of the Index equals the
aggregate value of the Index share weights, also known as the Index shares, of
each of the Index securities multiplied by each such security's last sale price,
if during the trading day, or the NOCP, if at the end of the trading day,
divided by the divisor. The divisor serves the purpose of scaling such aggregate
index value to a lower order of magnitude which is more desirable for Index
reporting purposes. If trading in an Index security is halted while the market
is open, the last NASDAQ(R) traded price for that security is used for all Index
computations until trading resumes. If trading is halted before the market is
open, the previous day's NOCP is used. The Index began on February 22, 2006 at a
base value, or initial value, of 1000.00.
The formula for Index value is as follows: Aggregate Adjusted Market
Value/Divisor
The formula for the Divisor is as follows: (Market Value after
Adjustments/Market Value before Adjustments) X Divisor before
Adjustments
The Index is generally calculated without regard to cash dividends on component
securities.
The Index is calculated using NASDAQ(R) prices (not consolidated) during the day
(from 09:30:15 to 16:01:30) and the NOCP for the close. The Index is
disseminated every 15 seconds from 09:30:15 to 17:16:00 ET through the NASDAQ
Index Dissemination Services(SM) (NIDS(SM)). The closing value of the Index may
change up until 17:15:00 ET due to corrections to the NOCP of the component
securities.
INDEX ELIGIBILITY
The Index contains securities of the NASDAQ-100 Index(R) classified as
"technology" according to ICB. The eligibility for the Index is determined in a
two step process and the security has to meet both criteria in order to become
eligible for the Index.
1. The security must be part of the NASDAQ-100 Index(R), which includes
100 of the largest domestic and international non-financial
securities listed on NASDAQ(R) and is re-ranked annually.
2. The security must be classified as "technology" according to ICB.
INDEX MAINTENANCE
The Index is rebalanced quarterly such that each security is set at an equal
weight of the Index. Index share changes are not made during the period. However
changes arising from stock splits, stock dividends are made to the Index on the
evening prior to the effective date of such corporate action. In the case of
spin-offs of component securities, the price of the security will be adjusted
and a corresponding adjustment will be made to the Index shares of the security
such that the weight of the security in the Index will not change.
In the case of a special cash dividend or rights issuance, NASDAQ(R) will
determine on an individual basis whether to make a change to the price and/or
index shares of an Index security in accordance with NASDAQ(R) Index dividend
policy. If it is determined that a change will be made, it will become effective
on the morning of the ex-date and a corresponding adjustment will be made to the
Index shares of the security such that the weight of the security in the Index
will not change. Component changes to the Index will be handled in the following
manner:
1. If a component of the NASDAQ-100 Index(R) that is classified as
"technology" according to ICB is removed from the NASDAQ-100
Index(R), it will also be removed from the Index and as such if the
replacement security being added to the NASDAQ-100 Index(R) is
classified as "technology" according to ICB it will be added to the
Index and will assume the weight of the removed security on the
effective date;
2. If a component of the NASDAQ-100 Index(R) that is not classified as
"technology" according to ICB is removed and the replacement
security being added to the NASDAQ-100 Index(R) is classified as
"technology" according to ICB, the replacement security will be
added to the Index at the next quarterly rebalancing; however, if
the security change is not announced prior to the close of business
of the Tuesday before the third Friday, the security's addition to
the Index will be made in the following quarterly rebalance; and
3. If a component of the NASDAQ-100 Index(R) that is classified as
"technology" according to ICB is removed from the NASDAQ-100
Index(R) and the replacement security being added to the NASDAQ-100
Index(R) is not classified as "technology" according to ICB, the
security will be removed from the Index and the divisor of the Index
will be adjusted to ensure Index continuity.
INDEX REBALANCING
The Index is rebalanced quarterly such that each security is initially set at an
equal weight of the Index at the time of calculation. Equal weights are based
upon the aggregate capitalization of the Index, incorporating quarterly changes
for the underlying index, and the corresponding NOCP of the security at the
close of trading on the Tuesday in the week immediately preceding the week of
the third Friday in March, June, September, and December. Changes to the Index
110
shares will be made effective after the close of trading on the third Friday in
March, June, September and December and an adjustment to the divisor will be
made to ensure continuity of the Index.
In administering the Index, NASDAQ(R) will exercise reasonable discretion as it
deems appropriate. Information regarding the methodology for calculating the
Index is found on the NASDAQ(R) website (https://indexes.nasdaqomx.com/).
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that NASDAQ(R) no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND
INDEX CONSTRUCTION
To be eligible for inclusion in the Index, the security's U.S. listing must be
exclusively on NASDAQ(R) (unless the security was dually listed on another U.S.
market prior to January 1, 2004 and has continuously maintained such listing).
The Index includes all NASDAQ(R) listed banks and thrifts or their holding
companies (HCs) with an ICB (Industry Classification Benchmark) Code of 8355 (or
that the ABA determines should be classified as such), excluding:
1. Any of the 50 largest banks or thrifts based on asset size (and their
HCs), as determined by the most recently available call report data as
compiled by the FDIC.
2. Any banks or thrifts classified as having an international specialization,
as determined by the most recently available call report data as compiled
by the FDIC, provided that such institutions constitute the majority of
assets if in a holding company.
3. Any banks or thrifts classified as having a credit-card specialization, as
determined by the most recently available call report data as complied by
the FDIC, provided that such institutions constitute the majority of
assets if in a holding company.
In addition, a security must meet the following:
o a market capitalization of at least $200 million;
o a three-month average daily dollar trading volume of at least $500
thousand;
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn; and
o the issuer of the security must have "seasoned" on a recognized
market (generally, a company is considered to be seasoned if it has
been listed on a market for at least six months; in the case of
spin-offs, the operating history of the spin-off will be
considered).
INDEX CALCULATION
The Index is a market capitalization-weighted index. The value of the Index
equals the aggregate value of the Index share weights, also known as the "Index
Shares," of each of the securities included in the Index ("Index Securities")
multiplied by each such security's Last Sale Price, and divided by the divisor
of the Index. For purposes of this document, Last Sale Price refers to the last
sale price on NASDAQ, which may be the NASDAQ Official Closing Price (NOCP). The
divisor serves the purpose of scaling such aggregate value to a lower order of
magnitude which is more desirable for Index reporting purposes. If trading in an
Index Security is halted on its primary listing market, the most recent Last
Sale Price for that security is used for all index computations until trading on
such market resumes. Likewise, the most recent Last Sale Price is used if
trading in a security is halted on its primary listing market before the market
is open. The Index began on June 8, 2009 at a base value, or initial value, of
1000.00.
111
The formula for index value is as follows:
Aggregate Adjusted Market Value/Divisor
The formula for the divisor is as follows: (Market Value after
Adjustments/Market Value before Adjustments) X Divisor before Adjustments
Two versions of the Index are calculated - a price return index and a total
return index. The price return index (NASDAQ: ABQI) is ordinarily calculated
without regard to cash dividends on Index Securities. The total return index
(NASDAQ: ABQX) reinvests cash dividends on the ex-date. Both Indexes reinvest
extraordinary cash distributions.
The Index is calculated during the trading day and is disseminated once per
second from 09:30:01 to 17:16:00 ET. The closing value of the Index may change
up until 17:15:00 ET due to corrections to the Last Sale Price of the Index
Securities.
ELIGIBILITY
Index eligibility is limited to a specific security type only. The security type
eligible for inclusion in the Index is common stocks. Security types not
included in the Index are ADRs, closed-end funds, convertible debentures,
exchange traded funds, limited partnership interests, ordinary shares, preferred
stocks, rights, shares of beneficial interest, warrants, units and other
derivative securities.
Additionally, if at any time during the year other than the Evaluation, an Index
Security no longer meets the Eligibility Criteria, or is otherwise determined to
have become ineligible for inclusion in the Index, the security is removed from
the Index and is not replaced. In all cases, a security is removed from the
Index at its Last Sale Price.
INDEX MAINTENANCE
Changes in the price and/or Index Shares driven by corporate events such as
stock dividends, stock splits, and certain spin-offs and rights issuances are
adjusted on the ex-date. If the change in total shares outstanding arising from
other corporate actions is greater than or equal to 5.0%, the change is made as
soon as practicable. Otherwise, if the change in total shares outstanding is
less than 5%, then all such changes are accumulated and made effective at one
time on a quarterly basis after the close of trading on the third Friday in each
of March, June, September and December.
In the case of a special cash dividend, a determination is made on an individual
basis whether to make a change to the price of an Index Security in accordance
with its Index dividend policy. If it is determined that a change will be made,
it will become effective on the ex-date.
Ordinarily, whenever there is a change in Index Shares, a change in an Index
Security, or a change to the price of an Index Security due to spin-offs, rights
issuances or special cash dividends, the divisor is adjusted to ensure that
there is no discontinuity in the value of the Index which might otherwise be
caused by any such change. All changes are announced in advance and are
reflected in the Index prior to market open on the Index effective date.
INDEX REBALANCING
On a quarterly basis coinciding with the scheduled quarterly Index Share
adjustment procedures, the Index will be rebalanced if it is determined that:
(1) the current weight of the single largest market capitalization Index
Security is greater than 25.0% and (2) the "collective weight" of those Index
Securities whose individual current weights are in excess of 5%, when added
together, exceed 50.0% of the Index.
If either threshold is broken, the Index would be rebalanced using a modified
market capitalization-weighting such that the maximum weight of any Index
Security will not exceed 8% and no more than 5 securities are at that cap. The
excess weight of any capped security would be distributed proportionally across
the remaining Index Securities. If after redistribution, any of the 5 highest
ranked Index Securities were weighted below 8%, these securities would not be
capped. Next, any remaining Index Securities in excess of 4% would be capped at
4% and the excess weight would be redistributed proportionally across the
remaining Index Securities. The process would be repeated, if necessary, to
derive the final weights.
The above modified market capitalization-weighting methodology would be applied
to the capitalization of each Index Security, using the Last Sale Price of the
security at the close of trading on the last trading day in February, May,
August and November and after applying quarterly changes to the total shares
outstanding. Index Shares would then be calculated by multiplying the weight of
the security derived above by the new market value of the Index and dividing the
modified market capitalization for each Index Security by its corresponding Last
Sale Price.
In addition, a special rebalancing of the Index may be conducted at any time if
it is determined necessary to maintain the integrity of the Index.
112
In administering the Index, NASDAQ OMX(R) will exercise reasonable discretion as
it deems appropriate to ensure Index integrity.
Information regarding the methodology for calculating the Index is also found on
the NASDAQ(R) website (https://indexes.nasdaqomx.com/). The Fund expects to make
changes to its portfolio shortly after changes to the Index are released to the
public via the NASDAQ(R) website. Investors will be able to access the holdings
of the Fund and the composition and compilation methodology of the Index through
the Fund's website at www.ftportfolios.com.
In the event that NASDAQ OMX(R) no longer calculates the Index, the Index
license is terminated or the identity or character of the Index is materially
changed, the Board will seek to engage a replacement index. However, if that
proves to be impracticable, the Board will take whatever action it deems to be
in the best interests of the Fund. The Board will also take whatever actions it
deems to be in the best interests of the Fund if the Fund's shares are delisted.
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND
The Index is designed to track the performance of clean-energy companies that
are publicly traded in the United States. The Index is a modified market
capitalization-weighted index designed to track the performance of companies
that are primarily manufacturers, developers, distributors and/or installers of
emerging clean energy technologies, as defined by Clean Edge(R), Inc. ("Clean
Edge(R)"). The Index began on November 17, 2006 with a base value, or initial
value, of 250.00.
INITIAL ELIGIBILITY CRITERIA
To be eligible for inclusion in the Index, the security must be listed on
NASDAQ(R), the NYSE or the NYSE MKT.
Issuers of the security must be classified, according to Clean Edge(R), as
technology manufacturers, developers, distributors and/or installers of one of
the following sub-sectors:
o Advanced materials (nanotech materials, advanced membranes,
silicon-based materials and alternatives, bioplastics, etc. that
enable clean-energy technologies and/or reduce the need for
petroleum-based materials);
o Energy intelligence (conservation, automated meter reading, energy
management systems, smart grid, superconductors, power controls,
etc.);
o Energy storage and conversion (advanced batteries, hybrid
drivetrains, hydrogen, fuel cells for stationary, portable, and
transportation applications, etc.); and
o Renewable electricity generation and renewable fuels (solar
photovoltaics, concentrating solar, wind, geothermal, and ethanol,
biodiesel, biofuel enabling enzymes, etc.).
As of the semi-annual re-evaluations, the security must also have:
o a minimum market capitalization of $75 million;
o an average daily trading volume of a least 100,000 shares;
o a minimum closing price of $1.00; and
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible.
CONTINUED ELIGIBILITY CRITERIA
In addition to the criteria above, the following criteria will be monitored
continually.
o The security may not be issued by an issuer currently in bankruptcy
proceedings;
o The security may not be placed in a trading halt for two or more
consecutive weeks; and
o The issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn.
For purposes of Index eligibility criteria, if the security is a depositary
receipt representing a security of a non-U.S. issuer, then references to the
"issuer" are references to the issuer of the underlying security.
SEMI-ANNUAL EVALUATION
The Index securities shall be evaluated semi-annually in March and September
based on market data as monitored by NASDAQ(R). In such evaluations, Clean
Edge(R) will provide NASDAQ(R) a list of clean-energy companies as they have
identified. The NASDAQ(R) Clean Edge(R) Green Energy Index(SM) Committee (the
"Committee") will review and consider all recommendations provided. Once the
list of clean-energy companies has been finalized, NASDAQ(R) shall apply the
above eligibility criteria using market data through the previous February and
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August. Securities meeting the criteria will be included in the Index. Upon each
semi-annual evaluation, security additions and deletions shall be made effective
after the close of trading on each third Friday in March and September.
Ordinarily, if at the time during the year an Index security no longer meets the
Index inclusion criteria, or is otherwise determined to have become ineligible
for continued inclusion in the Index, the security will be deleted. In addition,
from time to time, the Committee may call a special meeting to review changes to
clean-energy companies including acquisitions, divestitures or other actions
that may affect a company's initial or continued eligibility. All changes to the
Index will become effective at a time determined by the Committee. If an Index
security is deleted, the Index divisor will be adjusted to ensure Index
continuity.
INDEX MAINTENANCE
Changes in the price and/or Index shares driven by corporate events such as
stock dividends, splits and certain spin-offs and rights issuance will be
adjusted on the ex-dividend date. If the change in total shares outstanding
arising from other corporate actions is greater than or equal to 5%, the change
will be made as soon as practicable, normally within ten (10) days of such
action. Otherwise, if the change in total shares outstanding is less than 5%,
then all such changes are accumulated and made effective at one time on a
quarterly basis after the close of trading on the third Friday in each of March,
June, September, and December.
In the case of a special cash dividend, NASDAQ(R) will determine on an
individual basis whether to make a change to the price of an Index security in
accordance with its Index dividend policy. If it is determined that a change
will be made, it will become effective on the ex-dividend date and a
corresponding adjustment will be made to the Index shares of the security such
that the weight of the Index security will not change.
In addition, other Index share changes may be made between semi-annual
evaluation periods only to the extent that the change in total shares
outstanding equals or exceeds +5%. In this case, changes will be made effective
as soon as practicable, normally within ten days of such action.
In general, an initial public offering or other securities will not be added to
the Index between the semi-annual evaluations unless determined by the
Committee.
Ordinarily, whenever there is a change in Index shares or a change in an Index
security, the divisor is adjusted to ensure that there is no discontinuity in
the value of the Index, which might otherwise be caused by any such change. All
changes are announced in advance and will be reflected in the Index prior to
market open on the Index effective date.
The formula for the Divisor can be determined as follows:
(Market Value after Adjustments/Market Value before Adjustments) x Divisor
before Adjustments
INDEX REBALANCING
The Index shall employ a modified market capitalization-weighting methodology.
On a quarterly basis coinciding with the third Friday of each March, June,
September and December, the Index will be rebalanced such that the maximum
weight of any security will not exceed 8% and no more than five securities shall
be greater than 4%. Any security then in excess of 4% will be capped at 4%. The
aggregate amount by which all securities over 8% and 4% is reduced will be
redistributed proportionately across the remaining securities. The percentage
weighting cap on the individual stock weighting may change from time to time, as
necessary, to ensure continued representation of current market conditions.
After the redistribution, if any other security then exceeds 4%, the security is
set to 4% of the Index and the redistribution is repeated.
In administering the Index, NASDAQ(R) will exercise reasonable discretion as it
deems appropriate.
Information regarding the methodology for calculating the Index is also found on
the NASDAQ(R) website (https://indexes.nasdaqomx.com/). The Fund expects to make
changes to its portfolio shortly after changes to the Index are released to the
public via the NASDAQ(R) website. Investors will be able to access the holdings
of the Fund and the composition and compilation methodology of the Index through
the Fund's website at www.ftportfolios.com.
In the event that NASDAQ(R) no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the Fund's shares are delisted.
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FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND
INDEX DESCRIPTION
The Index is an equal-dollar weighted index designed to measure the performance
of a cross section of companies in the biotechnology industry that are primarily
involved in the use of biological processes to develop products or provide
services. Such processes include, but are not limited to, recombinant DNA
technology, molecular biology, genetic engineering, monoclonal antibody-based
technology, lipid/liposome technology, and genomics.
INDEX CALCULATION
The Index is calculated using a equal-dollar weighting methodology to ensure
that each of the component securities is represented in approximately equal
dollar amounts in the Index. Equal-dollar weighting was established by
designating the number of shares of each component security to represent
approximately $10,000 in market value, based on closing prices on October 18,
1991, the date the Index was established. The aggregate value of the stocks was
reduced by a divisor to establish an Index benchmark value of 200.00.
INDEX ELIGIBILITY AND MAINTENANCE
The Index is calculated and maintained by NYSE Arca. NYSE Arca may change the
composition of the Index at any time to reflect the conditions of the
biotechnology industry and to ensure that the component securities continue to
represent the biotechnology industry. The Index is maintained in accordance with
NYSE Arca Rule 5.13(c), which, among other things, requires that securities meet
the following requirements in order to be eligible for inclusion in the Index:
o Each component security must be an "NMS stock" as defined in Rule
600 of Regulation NMS of the Securities Exchange Act of 1934;
o Each component security must have a market capitalization of at
least $75 million, except that for each of the lowest weighted
component securities in the Index that in the aggregate account for
no more than 10% of the weight of the Index, the market
capitalization must be at least $50 million;
o Trading volume of each component security must be at least 500,000
shares for each of the last six months, except that for each of the
lowest weighted component securities in the Index that in the
aggregate account for no more than 10% of the weight of the Index,
trading volume must be at least 400,000 shares for each of the last
six months;
o Component securities that account for at least 90% of the weight of
the Index, and at least 80% of the total number of component
securities in the Index satisfy the requirements of Arca Rule 5.3
applicable to individual underlying securities; and
o Non-U.S. component securities (stocks or American Depositary
Receipts) that are not subject to comprehensive surveillance
agreements do not in the aggregate represent more than 20% of the
weight of the Index.
Every quarter after the close of trading on the third Friday of January, April,
July and October, the Index portfolio is adjusted by changing the number of
shares of each component stock so that each one again represents an
approximately equal dollar amount in the Index. The newly adjusted portfolio
becomes the basis for the Index's value effective on the first trading day
following the quarterly adjustments. If necessary, a divisor adjustment is made
to ensure continuity of the Index's value.
The number of shares of each component stock in the Index portfolio remain fixed
between quarterly reviews, except in the event of certain types of corporate
actions such as the payment of a dividend, other than an ordinary cash dividend,
stock distribution, stock split, reverse stock split, rights offering, or a
distribution, reorganization, recapitalization, or some such similar event with
respect to a component stock. When the Index is adjusted between quarterly
reviews for such events, the number of shares of the relevant security will be
adjusted, to the nearest whole share, to maintain the component's relative
weight in the Index at the level immediately prior to the corporate action. The
Index may also be adjusted in the event of a merger, consolidation, dissolution,
or liquidation of an issuer of a component stock. In the event of a stock
replacement, the average dollar value of the remaining components that are
assigned to the lower Index weight will be calculated and that amount invested
in the new component stock to the nearest whole share. In choosing among
biotechnology industry stocks that meet the minimum criteria set forth in NYSE
Arca Rule 5.13(c), NYSE Arca represents that it will make every effort to add
new stocks that are representative of the biotechnology industry and will take
in account, among other factors, a stock's capitalization, liquidity,
volatility, and name recognition. In connection with any adjustments to the
Index, the Index divisor is adjusted to ensure that there are no changes to the
Index level as a result of non-market forces. Similar to other index values
published by NYSE Arca, the value of the Index is published every 15 seconds
through NYSE Arca's data publication network.
Information regarding the methodology for calculating the Index is also found on
the NYSE website (www.nyse.com).
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NYSE Arca publishes the changes to the Index on the effective date of the
change. All replacement companies are selected based on the selection criteria
set forth herein.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that NYSE Arca no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST S&P REIT INDEX FUND
Generally, REITs are companies that own and most often actively manage
income-generating commercial real estate. Some REITs make or invest in loans and
other obligations that are secured by real estate collateral.
The Index is a subset of the S&P Developed REIT Index, which measures the
performance of more than 267 REITs or REIT-like structures in 14 developed
markets. The S&P Developed REIT Index is a sub-index of the S&P Global BMI
Index. The S&P Global BMI Index contains more than 450 constituents from more
than 30 countries and serves as the universe from which constituents of other
property indices may be drawn.
The S&P Developed REIT Index aims to represent an accurate measure of the REIT
developed equity market, reflecting the risk and return characteristics of this
broad universe on an on-going basis. The Index contains those constituents of
the S&P Developed REIT Index that are domiciled in the United States. As of
March 31, 2009, the Index is comprised of 104 companies and covers approximately
98% of the U.S. REIT market (based on capitalization).
The Index committee makes constituent changes on an as-needed basis. Share
adjustments that exceed 5% are made at the time of the change. Share adjustments
of less than 5% are made on a quarterly basis. The index committee announces all
changes affecting the Index to the public via press releases, which are
available on S&P's website.
CRITERIA FOR INDEX ADDITIONS
o ELIGIBILITY: Only equity REITs are eligible for addition.
o MAJOR EXCHANGE: A REIT must trade on the NYSE, the NYSE MKT or
NASDAQ(R) to be considered for inclusion.
o MARKET CAPITALIZATION: A REIT must maintain a market capitalization
in excess of $100 million to be considered.
o DIVIDEND PAYMENT: A REIT must have made a dividend payment in the
previous year to be considered for inclusion.
o PUBLIC FLOAT: A REIT must have a public float of at least 50% of its
stock.
o LIQUIDITY AND PRICE: A REIT must have adequate liquidity and
reasonable per share price in that the ratio of annual dollar value
traded to market capitalization should be 0.3 or greater. S&P
believes that very low stock prices can affect a stock's liquidity.
o TRADING HISTORY: After an initial public offering, a REIT must trade
for at least six months before it will be considered for inclusion.
o FINANCIAL VIABILITY: A REIT must demonstrate positive as-reported
earnings, which are Generally Accepted Accounting Principles (GAAP)
net income excluding discontinued operations and extraordinary
items, usually measured over four consecutive quarters.
o SECTOR CLASSIFICATION: A REIT must be classified in the Real Estate
Industry Group sub-classification of the financials sector of the
Global Industry Classification Standard.
CRITERIA FOR INDEX REMOVALS
o REITs that substantially violate one or more of the criteria for
Index additions.
o REITs that are consolidated into other REITs, or which restructure
so that they no longer meet the criteria for Index inclusion.
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INDEX METHODOLOGY
The primary goal of the Index is to provide investors with a reliable indicator
of the securitized U.S. real estate market. S&P makes constituent changes on an
"as-needed" basis. Constituent adjustments that exceed 5% are made at the time
of the change. Constituent adjustments of less than 5% are made on a quarterly
basis. S&P announces all changes to the Index to the public via press releases.
Information regarding changes to the Index, as well as the Index constituents,
are available on S&P's website at http://www.spindices.com.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that S&P no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
REAL ESTATE INVESTMENT TRUSTS
Real estate investment trusts, or "REITs," are companies that own and most often
actively manage income-generating commercial real estate. Some REITs make or
invest in loans and other obligations that are secured by real estate
collateral. Most REITs are publicly traded. REITs receive special tax
considerations and are generally a highly liquid method of investing in real
estate.
REITs are generally categorized as equity REITs, mortgage REITs or hybrid REITs.
Equity REITs invest in and own properties, and thus are responsible for the
equity or value of their real estate assets. Their revenues come principally
from their properties' rents. Mortgage REITs deal in investment and ownership of
property mortgages. These REITs loan money for mortgages to owners of real
estate or purchase existing mortgages or mortgage-backed securities. Their
revenues are generated primarily by the interest that they earn on the mortgage
loans. Hybrid REITs combine the investment strategies of equity REITs and
mortgage REITs by investing in both properties and mortgages.
FIRST TRUST US IPO INDEX FUND
IPOX(R) is the creator of the Index. The Index is a modified value-weighted
price index measuring the performance of the top 100 U.S. companies ranked
quarterly by market capitalization in the IPOX(R) Global Composite Index. The
Index measures the performance of the top 100 companies representing on average
30.15% of the total market capitalization in the IPOX(R) Global Composite Index.
The IPOX(R) Global Composite Index is a fully market capitalization-weighted
index that is dynamically rebalanced and is constructed and managed to provide a
broad and objective view of global aftermarket performance of IPOs and spin-offs
in all world countries (emerging and developed).
o After applying initial screens, all eligible constituents enter on
the close of the sixth trading day and remain in the index for a
pre-determined 1000 trading days or approximately four years
thereafter. The criteria applied to select constituents of the
former IPOX(R) Composite U.S. Index are now the criteria applied to
select the U.S. constituents of the IPOX(R) Global Composite Index.
o On any given day, the value of the IPOX(R) Global Composite Index is
the quotient of the total market capitalization of its constituents
and its divisor. Continuity in the values of the IPOX(R) Global
Composite Index is maintained by adjusting the divisor for all
changes in the constituents share capital after the base date. This
includes additions and deletions to the index, rights issues, share
buybacks and issuances, and spin-offs, etc. The divisor's time
series is, in effect, a chronological summary of all changes
affecting the base capital of the IPOX(R) Global Composite Index.
The divisor is adjusted such that the value of the IPOX(R) Global
Composite Index at an instant just prior to a change in base capital
equals the value at an instant immediately following that change.
With its fixed number of constituents stocks, the Index pooled approximately
$1,041 billion of U.S. stock market capitalization, as of March 31, 2014. The
Index typically includes large IPOs. The Index is reconstituted quarterly to
reflect changes in stock market values of the IPOX(R) Global Composite Index
constituents and IPO activity during the past quarter with potential new
companies entering the Index while other companies reach 1,000 days in the Index
and automatically drop out. To ensure that certain diversification requirements
are met, the weighting of the largest Index constituents is capped at 10% at the
quarterly reconstitution event.
The Index provides average, rather than median, exposure to the performance of
IPOs, once companies are public. This is notable because of the well-known
skewness in the distribution of long-run IPO returns. The underlying and well
117
reported empirical features in IPOs make products benchmarked against the Index
interesting for a number of market participants with varying investment
horizons, such as the retail buy-and-hold community and high-net worth
individuals seeking average IPO exposure, arbitrageurs, traders or index
spreaders.
Information regarding the methodology for calculating the Index is also found on
the IPOX(R) website (www.ipoxschuster.com).
IPOX(R) publishes the changes to the Index and posts the changes on its website
at www.ipoxschuster.com two days prior to the effective date of any such change.
All replacement companies are selected based on the selection criteria set forth
herein.
The updated values of the Index are distributed by S&P and NYSE Arca during
trading hours (9:30 a.m. to 4:00 p.m. New York time) every 15 seconds through
their quotation network to a variety of data vendors. In addition, delayed
quotations of the Index are available on www.ipoxschuster.com every five minutes
during regular trading hours. S&P acts as the calculation agent for the IPOX(R)
indices.
The Index is reviewed quarterly according to March, June, September and December
Options and Futures Expiration Cycles. Specifically, on the close of the second
Wednesday in the quarter, the constituents of the IPOX(R) Global Composite Index
are ranked by full market capitalization. The top 100 U.S constituents ranked by
full market capitalization in the IPOX(R) Global Composite Index trading within
their 1,000th trading day anniversary on the stock market at the time of the
forthcoming quarterly expiration are then declared new Index constituents. The
newly adjusted Index membership list takes effect on the Monday following the
third Friday of every quarter until the next reconstitution process.
As of September 2012, the IPOX U.S. 100 Index (IPXO) is calculated by Structured
Solutions AG.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that IPOX(R) no longer maintains the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND
The Index divisor was initially determined to yield a benchmark value of 1000.00
at the close of trading on January 16, 2007. The Fund will make changes to its
portfolio holdings when changes are made by Value Line in the composition of the
Index. The holdings of the Fund and the composition and compilation methodology
of the Index will be available on the Fund's website at www.ftportfolios.com.
Value Line's updated rankings are released weekly on its website at
www.valueline.com.
Daily historical Index values are calculated by NYSE Arca, as calculation agent
for the Index, and available on its website at www.nyse.com. The Index includes
100 stocks that Value Line gives a Timeliness Ranking of #1 using the Value Line
Timeliness Ranking System. Value Line's updated rankings are released weekly on
its website at www.valueline.com.
THE VALUE LINE(R) TIMELINESS(TM) RANKING SYSTEM
The Value Line Timeliness Ranking System was introduced in its present form in
1965. Each week Value Line assigns a Timeliness rank to each of the
approximately 1,700 stocks in the Value Line universe. As of March 31, 2014,
approximately 23.17% of the stocks in the Value Line universe were large cap
companies, approximately 33.31% were mid cap companies and approximately 43.51%
were small cap companies. The market capitalization of the approximately 1,700
stocks in the Value Line universe ranged from $18 million to $479 billion as of
this same date. The average market capitalization of the stocks in the Value
Line universe was $15.7 billion and the median market capitalization was $4.6
billion as of this same date. Approximately 90.2% of the companies in the Value
Line(R) universe were domiciled in the United States as of this same date.
According to information published by Value Line, the Value Line Timeliness rank
measures the expected price performance relative to the other stocks in the
universe over the following six to 12 months. According to reports published by
Value Line, the factors considered in determining the Timeliness Rank include:
(i) a company's earnings growth; (ii) a company's earnings growth over the past
ten years in relation to the recent price performance of the company's stock
relative to all of the approximately 1,700 stocks in the Value Line universe;
(iii) a company's recent quarterly earnings performance; and (iv) a company's
reporting of results that are significantly better or worse than market
expectations. Value Line combines these factors to determine the Timeliness(TM)
Rank. All data are known and actual.
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Stocks ranked #1 (highest) and #2 (above average) are likely to outpace the
year-ahead market. Those ranked #4 (below average) and #5 (lowest) are not
expected to outperform most stocks over the next 12 months. Stocks ranked #3
(average) will probably advance or decline with the market in the year ahead.
Please note that because Value Line assigns a Timeliness rank weekly and the
Index reconstitutes monthly, the Index may, for the remainder of any given
monthly period, contain securities that are no longer ranked #1 for Timeliness.
Value Line, Inc., founded in 1931, is known for the Value Line Investment
Survey, a widely used independent investment service. The Value Line Investment
Survey is a comprehensive source of information, covering approximately 1,700
stocks, more than 90 industries, the overall stock market and the economy.
According to information published by Value Line, when selecting stocks for the
Value Line Investment Survey, Value Line's stated primary goal is to choose
issues that will be of most interest to their subscribers. In this regard, Value
Line has stated that it looks for actively traded stocks, with reasonably large
market capitalizations. Value Line has stated that it also attempts to provide
broad industry coverage and will add stocks in industries that they think are
underrepresented or that are in new industries that they have not previously
followed. According to information published by Value Line, the companies
selected for the Value Line Investment Survey are chosen based on the following
criteria: (i) market capitalization should be at least $400 million; (ii) the
stock should trade for at least $10 per share at the time of selection; and
(iii) the stock's float must be more than 10 million shares.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that NYSE Arca no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever actions it deems to be
in the best interests of the Fund if the Fund's shares are delisted.
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND
The Index begins with the universe of stocks that Value Line gives a Safety
Ranking of #1 or #2 using the Value Line Safety Ranking System. All registered
investment companies, limited partnerships and foreign securities not listed in
the United States are removed from this universe. From those stocks, Value Line
selects those companies with a higher than average dividend yield, as compared
to the indicated dividend yield of the S&P 500 Index. Value Line then eliminates
those companies with an equity market capitalization of less than $1 billion.
When the Index is initially configured or reconfigured (as noted below), the
Index seeks to be equally weighted in each of the securities in the Index.
After the initial selection of securities, the Index is rebalanced by the
application of the above model on a monthly basis. The Index divisor was
initially determined to yield a benchmark value of 1,000.00 at the close of
trading on July 3, 2006. The holdings of the Fund and the composition and
compilation methodology of the Index are available on the Fund's website at
www.ftportfolios.com. Updated rankings of Value Line are released weekly on its
website at www.valueline.com.
Daily historical Index values are calculated by NYSE Arca, as calculation agent
for the Index, and available on its website at www.nyse.com. The Index includes
the universe of stocks that Value Line gives a Safety Ranking of #1 or #2 using
the Value Line Safety Ranking System. Value Line's updated rankings are released
every Monday morning on its website at www.valueline.com.
THE VALUE LINE(R) SAFETY(TM) RANKING SYSTEM
The Value Line Safety Ranking System was introduced in its present form in the
mid-1960s. Each week Value Line assigns a Safety rank to each of the
approximately 1,700 stocks in the Value Line universe. According to information
published by Value Line, the Value Line Safety rank measures the total risk of a
stock relative to the other stocks in the Value Line universe. According to
information published by Value Line, the Value Line Safety rank is determined as
follows: the Value Line Safety rank is derived from two equally weighted
measurements, a stock's Price Stability rank and the Financial Strength rating
of a company, each of which as determined by Value Line.
Value Line measures the volatility of each of the stocks in the Value Line
universe through means of its Price Stability score. A stock's Price Stability
score is based on a ranking of the standard deviation of weekly percent changes
in the price of a stock over the last five years. Standard deviation is the
measure of dispersion of historical returns around a mean rate of return, and a
lower standard deviation indicates less volatility. To determine standard
deviation, each week Value Line compares the common stock prices of each of the
companies in the Value Line universe to their prices as of the previous week.
Value Line performs this calculation for each weekly period over the previous
five years and based on these calculations determines the standard deviation
over this five year period of each stock in the Value Line universe. Based on
the standard deviations scores, Value Line places each of the companies in the
Value Line universe into 20 separate groups consisting of an approximately equal
119
number of companies. Value Line reports Price Stability on a scale of 100
(highest) to 5 (lowest) in increments of 5. Stocks which receive a Price
Stability rank of 100 by Value Line represent the 5% of the companies in the
Value Line universe with the lowest standard deviation, whereas stocks which
receive a Price Stability rank of 5 represent the 5% of the companies in the
Value Line universe with the highest standard deviation.
A company's Financial Strength rating is Value Line's measure of the company's
financial condition, and is reported on a scale of A++ (highest) to C (lowest).
According to Value Line, it looks at a number of balance sheet and income
statement factors in assigning the Financial Strength ratings. These include,
but are not limited to, a company's long-term debt to total capital ratio,
short-term debt, the amount of cash on hand, the level of net income, the level
and growth of sales over time, and the consistency of sales, profits and returns
on capital and equity over an extended timeframe. Value Line also looks at the
type of industry a company is in, a company's position and performance within an
industry, and the cyclical nature of an industry. Finally, Value Line considers
a company's share price movement. According to Value Line, sharp declines in
price in a short period of time (especially in a relatively stable equity market
environment) can signal a future financial reversal while a rising stock price
with no takeover news may be a sign of improving fundamentals. Based upon the
foregoing, Value Line assigns the highest Financial Strength scores to what
Value Line determines to be the largest companies with the strongest balance
sheets.
Value Line assigns Safety ranks on a scale from 1 (safest) to 5 (riskiest). The
number of stocks in each category from 1 to 5 is not fixed. According to
information published by Value Line, stocks ranked #1 (Highest) for Safety, as a
group, are (in Value Line's opinion) the safest, most stable, and least risky
investments relative to the Value Line universe, which accounts for about 95% of
the market volume of all stocks in the United States, and stocks ranked #2
(Above Average) for Safety, as a group, are safer and less risky than most.
Value Line, Inc., founded in 1931, is known for The Value Line Investment
Survey, a widely used independent investment service. The Value Line Investment
Survey is a comprehensive source of information, covering approximately 1,700
stocks, more than 90 industries, the overall stock market and the economy.
According to information published by Value Line, when selecting stocks for the
Value Line Investment Survey, Value Line's stated primary goal is to choose
issues that will be of most interest to their subscribers. In this regard, Value
Line has stated that it looks for actively traded stocks, with reasonably large
market capitalizations. Value Line has stated that it also attempts to provide
broad industry coverage and will add stocks in industries that they think are
underrepresented or that are in new industries that they have not previously
followed. According to information published by Value Line, the companies
selected for the Value Line Investment Survey are chosen based on the following
criteria: (i) market capitalization should be at least $400 million; (ii) the
stock should trade for at least $10 per share at the time of selection; (iii)
the stock's float must be more than 10 million shares.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that NYSE Arca no longer calculates the Index, the Index license is
terminated or the identity or character of the Index is materially changed, the
Board will seek to engage a replacement index. However, if that proves to be
impracticable, the Board will take whatever action it deems to be in the best
interests of the Fund. The Board will also take whatever action it deems to be
in the best interests of the Fund if the shares are delisted.
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND
The Index is designed to objectively identify and select those stocks from the
Value Line universe across market capitalizations and investment styles for
growth and value that appear to have the greatest potential for capital
appreciation. The Index begins with the Value Line 1700 universe of stocks that
Value Line gives a Timeliness, Safety or Technical Ranking of #1 or #2 using the
Value Line Ranking Systems. All registered investment companies, non-U.S.
securities not listed in the United States and limited partnerships are removed
from this universe. The stocks are then separated into large, mid and small cap
categories based on specified capitalization ranges. To determine a company's
market capitalization category, the market capitalization of all the stocks
listed on the NYSE (other than unit investment trusts, closed-end funds, real
estate investment trusts, foreign stocks and ADRs) are divided into various
deciles. Large capitalization stocks are companies falling into deciles 1-2,
mid-capitalization stocks are companies in deciles 3-5 and small capitalization
stocks are companies in deciles 6-8. Within these capitalization ranges, stocks
which do not meet certain daily trading volume amounts are eliminated. For large
capitalization stocks, stocks with a three-month average daily trading volume of
less than $5 million are eliminated. For mid-capitalization stocks, stocks with
a three-month average daily trading volume of less than $2 million are
eliminated. Small-capitalization stocks with a three-month average daily trading
volume of less than $2 million are eliminated. Small-capitalization stocks with
a market capitalization of less than $250 million or with a market
capitalization of less than $1 billion and a Timeliness ranking of #1 also are
eliminated. The remaining stocks are then divided into growth and value
universes by reference to the stock's price to book ratio. Accordingly, there
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are six style classifications: Large Cap Value, Mid Cap Value, Small Cap Value,
Large Cap Growth, Mid Cap Growth and Small Cap Growth. Value Line determines the
equity allocations among the style classifications.
The stocks in each style classification are then ranked using a three factor
model. For growth portfolios, the three factor model incorporates cash flow to
price ratio, return on assets and the stock's three month price appreciation.
For value portfolios, the three factor model incorporates the one year change in
return on assets, book to price ratio and the stock's three month price
appreciation. The sum of the ranks of the three factors is used to rank each
stock. Each factor is equally weighted; however, in the event of a tie, the
price appreciation factor will be used as the tie-breaker. The 25 highest ranked
stocks (lowest total sum of ranks) in each of the six style classifications are
selected. The stocks are equally weighted within each classification.
After the initial selection of securities, on a weekly basis, stocks in the
Index generally are removed when they are no longer within the Value Line
universe of #1 or #2 rankings and have fallen to #4 or #5 for the Value Line
factor that originally made the stock eligible for the Index. Stocks that retain
a Value Line rank of #1 or #2 for any factor will not be eliminated. Replacement
stocks are then added generally starting from the highest ranked stock not
already in the Index based on the most recent rankings, subject to certain
limited exceptions. For purposes of determining replacement securities, the
model to rank the securities eligible for the Index is determined every other
month. Replacement securities are selected from the most recent rankings list.
The Index is also rebalanced on the application of the above model on a
semi-annual basis on the fourth business day of the week containing the third
Friday of February and August. The Index divisor was initially determined to
yield a benchmark value of 1,000.00 at the close of trading on May 1, 2006.
The composition of the Value Line Equity Allocation Index is reconstituted and
rebalanced by Value Line semi-annually in February and August and additions to
or subtractions from the Value Line Equity Allocation Index occur following this
review. The Value Line Equity Allocation Index is reviewed weekly to ensure the
Index includes the highest ranked stocks. Daily historical Index values are
calculated by NYSE Arca, as calculation agent for the Index, and are available
on its website at www.nyse.com. The Value Line Equity Allocation Index includes
the universe of stocks that Value Line gives a Timeliness, Safety, or Technical
Ranking of #1 or #2 using the Value Line Timeliness, Safety and Technical
Ranking Systems.
THE VALUE LINE(R) TIMELINESS(TM) RANKING SYSTEM
The present Value Line Timeliness Ranking System was introduced in 1965. Each
week the Value Line Timeliness Ranking System screens a wide array of data using
a series of proprietary calculations to rank each of the approximately 1,700
stocks in the Value Line universe for expected price performance for the coming
six to 12 months. Stocks are ranked from #1 (highest expected price performance)
to #5 (lowest expected price performance). At any one time there are 100 stocks
ranked #1, 300 ranked #2, approximately 900 ranked #3, approximately 300 ranked
#4 and 100 ranked #5.
According to reports published by Value Line, the factors considered in
determining the Timeliness Rank include: (i) a company's earnings growth; (ii) a
company's earnings growth over the past ten years in relation to the recent
price performance of the company's stock relative to all of the approximately
1,700 stocks in the Value Line universe; (iii) a company's recent quarterly
earnings performance; and (iv) a company's reporting of results that are
significantly better or worse than market expectations. Value Line combines
these and other factors to determine the Timeliness rank.
THE VALUE LINE(R) SAFETY(TM) RANKING SYSTEM
The Value Line Safety Ranking System was introduced in its present form in the
mid-1960s. Each week Value Line assigns a Safety rank to each of the
approximately 1,700 stocks in the Value Line universe. According to information
published by Value Line, the Value Line Safety rank measures the total risk of a
stock relative to the other stocks in the Value Line universe. According to
information published by Value Line, the Value Line Safety rank is determined as
follows: the Value Line Safety rank is derived from two equally weighted
measurements, a stock's Price Stability rank and the Financial Strength rating
of a company, each of which as determined by Value Line.
Value Line measures the volatility of each of the stocks in the Value Line
universe through means of its Price Stability score. A stock's Price Stability
score is based on a ranking of the standard deviation of weekly percent changes
in the price of a stock over the last five years. Standard deviation is the
measure of dispersion of historical returns around a mean rate of return, and a
lower standard deviation indicates less volatility. To determine standard
deviation, each week Value Line compares the common stock prices of each of the
companies in the Value Line universe to their prices as of the previous week.
Value Line performs this calculation for each weekly period over the previous
five years and based on these calculations determines the standard deviation
over this five year period of each stock in the Value Line universe. Based on
the standard deviations scores, Value Line places each of the companies in the
Value Line universe into 20 separate groups consisting of an approximately equal
number of companies. Value Line reports Price Stability on a scale of 100
(highest) to 5 (lowest) in increments of 5. Stocks which receive a Price
Stability rank of 100 by Value Line represent the 5% of the companies in the
Value Line universe with the lowest standard deviation, whereas stocks which
receive a Price Stability rank of 5 represent the 5% of the companies in the
Value Line universe with the highest standard deviation.
121
A company's Financial Strength rating is Value Line's measure of the company's
financial condition, and is reported on a scale of A++ (highest) to C (lowest).
According to Value Line, it looks at a number of balance sheet and income
statement factors in assigning the Financial Strength ratings. These include,
but are not limited to, a company's long-term debt to total capital ratio,
short-term debt, the amount of cash on hand, the level of net income, the level
and growth of sales over time, and the consistency of sales, profits and returns
on capital and equity over an extended timeframe. Value Line also looks at the
type of industry a company is in, a company's position and performance within an
industry, and the cyclical nature of an industry. Finally, Value Line considers
a company's share price movement. According to Value Line, sharp declines in
price in a short period of time (especially in a relatively stable equity market
environment) can signal a future financial reversal while a rising stock price
with no takeover news may be a sign of improving fundamentals. Based upon the
foregoing, Value Line assigns the highest Financial Strength scores to what
Value Line determines to be the largest companies with the strongest balance
sheets.
Value Line assigns Safety ranks on a scale from 1 (safest) to 5 (riskiest). The
number of stocks in each category from 1 to 5 is not fixed. According to
information published by Value Line(R), stocks ranked #1 (Highest) for Safety,
as a group, are (in Value Line's opinion) the safest, most stable, and least
risky investments relative to the Value Line universe, which accounts for about
95% of the market volume of all stocks in the United States, and stocks ranked
#2 (Above Average) for Safety, as a group, are safer and less risky than most.
THE VALUE LINE(R) TECHNICAL(TM) RANKING SYSTEM
The Value Line Technical Ranking System was introduced in its present form in
1984. As with the Safety and Timeliness Ranking Systems, each week Value Line
uses a proprietary formula to predict short-term (three to six month) future
price returns relative to the Value Line universe of 1,700 stocks. The rankings
of the stocks (from #1 to #5, with #1 being the highest rank) are the result of
an analysis which relates 10 price trends of different durations for a stock
during the past year to the relative price changes of the same stock expected
over the succeeding three to six months.
Value Line, Inc., founded in 1931, is known for The Value Line Investment
Survey, a widely used independent investment service. The Value Line Investment
Survey is a comprehensive source of information, covering approximately 1,700
stocks, more than 90 industries, the overall stock market and the economy.
According to information published by Value Line, when selecting stocks for the
Value Line Investment Survey, Value Line's stated primary goal is to choose
issues that will be of most interest to their subscribers. In this regard, Value
Line has stated that it looks for actively traded stocks, with reasonably large
market capitalizations. Value Line has stated that it also attempts to provide
broad industry coverage and will add stocks in industries that they think are
underrepresented or that are in new industries that they have not previously
followed. According to information published by Value Line, the companies
selected for the Value Line Investment Survey are chosen based on the following
criteria: (i) market capitalization should be at least $400 million; (ii) the
stock should trade for at least $10 per share at the time of selection; (iii)
the stock's float must be more than 10 million shares.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Value Line Equity
Allocation IndexM through the Fund's website at www.ftportfolios.com.
In the event that NYSE Arca no longer calculates the Value Line Equity
Allocation Index, the Value Line Equity Allocation Index license is terminated
or the identity or character of the Value Line(R) Equity Allocation Index is
materially changed, the Board will seek to engage a replacement index. However,
if that proves to be impracticable, the Board will take whatever action it deems
to be in the best interests of the Fund. The Board will also take whatever
action it deems to be in the best interests of the Fund if the shares are
delisted.
PREMIUM/DISCOUNT INFORMATION
The tables that follow present information about the differences between each
Fund's daily market price on the applicable Exchange and its net asset value.
The "Market Price" of a Fund generally is determined using the midpoint between
the highest bid and lowest offer on the Exchange, as of the time a Fund's net
asset value is calculated. A Fund's Market Price may be at, above, or below its
net asset value. The net asset value of a Fund will fluctuate with changes in
the market value of its portfolio holdings. The Market Price of a Fund will
fluctuate in accordance with changes in its net asset value, as well as market
supply and demand.
Premiums or discounts are the differences (generally expressed as a percentage)
between the net asset value and Market Price of a Fund on a given day, generally
at the time net asset value is calculated. A premium is the amount that a Fund
is trading above the reported net asset value. A discount is the amount that a
Fund is trading below the reported net asset value.
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The following information shows the frequency distribution of premiums and
discounts of the daily bid/ask price of each Fund against each Fund's net asset
value. The information shown for each Fund is for the periods indicated.
Shareholders may pay more than net asset value when they buy Fund shares and
receive less than net asset value when they sell those shares because shares are
bought and sold at current market price. All data presented here represents past
performance, which cannot be used to predict future results. Information about
the premiums and discounts at which the Funds' shares have traded is available
on the Funds' website at www.ftportfolios.com.
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FIRST TRUST CAPITAL STRENGTH ETF (FTCS)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 134 0 0 0
3 Months Ended 3/31/2014 16 4 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 117 1 0 0
3 Months Ended 3/31/2014 39 2 0 0
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 155 5 0 0
3 Months Ended 3/31/2014 35 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 92 0 0 0
3 Months Ended 3/31/2014 26 0 0 0
FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 200 0 0 0
3 Months Ended 3/31/2014 42 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 52 0 0 0
3 Months Ended 3/31/2014 19 0 0 0
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FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 151 1 0 0
3 Months Ended 3/31/2014 21 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 98 2 0 0
3 Months Ended 3/31/2014 40 0 0 0
FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 66 0 0 0
3 Months Ended 3/31/2014 18 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 185 1 0 0
3 Months Ended 3/31/2014 43 0 0 0
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 149 0 0 0
3 Months Ended 3/31/2014 27 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 103 0 0 0
3 Months Ended 3/31/2014 34 0 0 0
FIRST TRUST ISE WATER INDEX FUND (FIW)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 197 0 0 0
3 Months Ended 3/31/2014 48 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 55 0 0 0
3 Months Ended 3/31/2014 13 0 0 0
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FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 171 0 0 0
3 Months Ended 3/31/2014 30 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 81 0 0 0
3 Months Ended 3/31/2014 31 0 0 0
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 203 0 0 0
3 Months Ended 3/31/2014 42 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 49 0 0 0
3 Months Ended 3/31/2014 19 0 0 0
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 145 13 0 0
3 Months Ended 3/31/2014 39 8 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 82 12 0 0
3 Months Ended 3/31/2014 14 0 0 0
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 170 0 0 0
3 Months Ended 3/31/2014 44 1 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 81 1 0 0
3 Months Ended 3/31/2014 16 0 0 0
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FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 139 24 0 0
3 Months Ended 3/31/2014 28 5 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 72 17 0 0
3 Months Ended 3/31/2014 25 3 0 0
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 168 5 0 0
3 Months Ended 3/31/2014 34 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 75 4 0 0
3 Months Ended 3/31/2014 26 1 0 0
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 204 0 0 0
3 Months Ended 3/31/2014 44 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 48 0 0 0
3 Months Ended 3/31/2014 17 0 0 0
FIRST TRUST S&P REIT INDEX FUND (FRI)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 130 0 0 0
3 Months Ended 3/31/2014 42 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 122 0 0 0
3 Months Ended 3/31/2014 19 0 0 0
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FIRST TRUST US IPO INDEX FUND (FPX)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 220 0 0 0
3 Months Ended 3/31/2014 48 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 32 0 0 0
3 Months Ended 3/31/2014 13 0 0 0
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 100 0 0 0
3 Months Ended 3/31/2014 39 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 152 0 0 0
3 Months Ended 3/31/2014 22 0 0 0
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 238 0 0 0
3 Months Ended 3/31/2014 56 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 14 0 0 0
3 Months Ended 3/31/2014 5 0 0 0
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
BID/ASK MIDPOINT VS. NET ASSET VALUE
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 140 0 0 0
3 Months Ended 3/31/2014 38 0 0 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NET ASSET VALUE
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
12 Months Ended 12/31/2013 104 8 0 0
3 Months Ended 3/31/2014 22 1 0 0
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TOTAL RETURN INFORMATION
The tables below compare the total return of each Fund to the total return of
the Index on which it is based and each Fund's benchmark indices. The
information presented for each Fund is for the period indicated. The total
returns would have been lower if certain fees had not been waived and expenses
reimbursed by First Trust.
"Average annual total returns" represent the average annual change in the value
of an investment over the period indicated. "Cumulative total returns" represent
the total change in value of an investment over the period indicated. The net
asset value per share of a Fund is the value of one share of a Fund and is
computed by dividing the value of all assets of the Fund (including accrued
interest and dividends), less liabilities (including accrued expenses and
dividends declared but unpaid), by the total number of outstanding shares. The
net asset value return is based on the net asset value per share of a Fund, and
the market return is based on the market price per share of a Fund. The price
used to calculate market return ("Market Price") generally is determined by
using the midpoint between the highest bid and the lowest offer on the Exchange
on which the shares of a Fund are listed for trading, as of the time that a
Fund's net asset value is calculated. Since the shares of each Fund typically do
not trade in the secondary market until several days after a Fund's inception,
for the period from inception to the first day of secondary market trading in
shares of a Fund, the net asset value of a Fund is used as a proxy for the
secondary market trading price to calculate market returns. Market and net asset
value returns assume that dividends and capital gain distributions have been
reinvested in a Fund at Market Price and net asset value, respectively. An Index
is a statistical composite that tracks a specified financial market or sector.
Unlike each Fund, an Index does not actually hold a portfolio of securities and
therefore does not incur the expenses incurred by a Fund. These expenses
negatively impact the performance of each Fund. Also, market returns do not
include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns reflect the reinvestment of dividends on securities in
the Indices. The returns shown in the table below do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption or
sale of shares of a Fund. The investment return and principal value of shares of
a Fund will vary with changes in market conditions. Shares of a Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. A Fund's past performance is no guarantee of future results.
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FIRST TRUST CAPITAL STRENGTH ETF (FTCS)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (7/6/2006) Ended (7/6/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 35.90% 19.76% 8.86% 146.33% 88.80%
Market Value 36.15% 19.94% 8.88% 148.20% 89.09%
INDEX PERFORMANCE
The Capital Strength
Index(SM) * N/A N/A N/A N/A N/A
S&P 500 Value Index 31.99% 16.61% 5.65% 115.59% 50.94%
S&P 500(R) Index 32.39% 17.94% 7.38% 128.19% 70.39%
<FN>
* On June 18, 2010, the Fund's underlying index changed from the Deutsche
Bank CROCI(R) US+ Index(TM) to the Credit Suisse U.S. Value Index, Powered
by HOLT(TM). On June 4, 2013, the Fund's underlying index changed from the
Credit Suisse U.S. Value Index, Powered by HOLT(TM) to The Capital Strength
Index(SM). Since the Fund's new underlying index had an inception date of
March 20, 2013, it was not in existence for any of the periods disclosed.
</FN>
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
Average Annual Cumulative
Total Returns Total Returns
Inception Inception
1 Year (8/29/2012) (8/29/2012)
Ended 12/31/2013 to 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 19.00% 12.70% 17.37%
Market Value 19.21% 12.81% 17.52%
INDEX PERFORMANCE
CBOE(R) VIX(R) Tail Hedge Index 19.43% 13.15% 17.99%
S&P 500(R) Index 32.39% 25.07% 34.94%
128
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FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (6/19/2006) Ended (6/19/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 53.40% 33.74% 15.72% 327.89% 200.49%
Market Value 53.44% 33.75% 15.73% 327.96% 200.54%
INDEX PERFORMANCE
Dow Jones Internet
Composite Index(SM) 54.36% 34.54% 16.38% 340.80% 213.59%
S&P 500(R) Index 32.39% 17.94% 7.73% 128.19% 75.23%
S&P Composite 1500
Information
Technology Index 28.99% 22.00% 10.08% 170.28% 106.20%
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (9/27/2005) Ended (9/27/2005)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 43.32% 18.17% 6.88% 130.45% 73.29%
Market Value 42.74% 18.14% 6.82% 130.11% 72.45%
INDEX PERFORMANCE
Dow Jones Select
MicroCap Index(SM) 44.25% 18.96% 7.63% 138.24% 83.61%
Russell 2000(R) Index 38.82% 20.08% 8.59% 149.69% 97.47%
FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (5/8/2007) Ended (5/8/2007)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 35.81% 20.41% 6.40% 153.07% 51.03%
Market Value 36.29% 20.27% 6.43% 151.69% 51.35%
INDEX PERFORMANCE
ISE ChIndia Index(TM) 36.41% 21.03% 6.98% 159.70% 56.64%
Russell 3000(R) Index 33.55% 18.71% 5.73% 135.71% 44.88%
MSCI Emerging
Markets Index -2.60% 14.79% 2.56% 99.33% 18.28%
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (5/8/2007) Ended (5/8/2007)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 25.13% 11.04% 0.11% 68.82% 0.73%
Market Value 24.99% 11.31% 0.10% 70.90% 0.69%
INDEX PERFORMANCE
ISE-REVERE Natural
Gas Index(TM) 25.73% 11.85% 0.78% 75.03% 5.30%
Russell 3000(R) Index 33.55% 18.71% 5.73% 135.71% 44.88%
S&P Composite
1500 Energy Index 25.39% 13.95% 6.29% 92.11% 50.04%
129
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FIRST TRUST ISE WATER INDEX FUND (FIW)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (5/8/2007) Ended (5/8/2007)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 30.91% 17.63% 9.09% 125.24% 78.29%
Market Value 30.92% 17.74% 9.10% 126.29% 78.44%
INDEX PERFORMANCE
ISE Water Index(TM) 31.90% 18.50% 9.84% 133.70% 86.66%
Russell 3000(R) Index 33.55% 18.71% 5.73% 135.71% 44.88%
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (3/9/2006) Ended (3/9/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 22.71% 15.23% 5.30% 103.19% 49.76%
Market Value 22.72% 15.16% 5.30% 102.58% 49.72%
INDEX PERFORMANCE
Morningstar(R) Dividend
Leaders Index(SM) 23.36% 15.84% 5.83% 108.59% 55.65%
S&P 500(R) Index 32.39% 17.94% 7.16% 128.19% 71.64%
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (4/19/2006) Ended (4/19/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 39.95% 24.76% 8.47% 202.31% 87.05%
Market Value 39.96% 24.79% 8.47% 202.63% 87.10%
INDEX PERFORMANCE
NASDAQ-100 Equal
Weighted Index(SM) 40.99% 25.56% 9.15% 212.02% 96.33%
S&P 500(R) Index 32.39% 17.94% 6.84% 128.19% 66.46%
NASDAQ-100 Index(R) 36.94% 25.56% 10.85% 212.13% 121.12%
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (2/8/2007) Ended (2/8/2007)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 41.24% 24.37% 8.85% 197.58% 79.42%
Market Value 41.07% 24.56% 8.85% 199.82% 79.43%
INDEX PERFORMANCE
NASDAQ-100 Ex-Tech
Sector Index(SM) 42.30% 25.16% 9.54% 207.17% 87.45%
Russell 1000(R) Index 33.11% 18.59% 6.11% 134.54% 50.49%
130
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FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (4/19/2006) Ended (4/19/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 38.12% 25.26% 8.05% 208.40% 81.50%
Market Value 38.26% 25.56% 8.06% 212.11% 81.65%
INDEX PERFORMANCE
NASDAQ-100 Technology
Sector Index(SM) 39.01% 26.07% 8.73% 218.42% 90.50%
S&P 500 Information
Technology Index 28.43% 21.90% 8.18% 169.13% 83.24%
S&P 500(R) Index 32.39% 17.94% 6.84% 128.19% 66.46%
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
Average Annual Cumulative
Total Returns Total Returns
Inception Inception
1 Year (6/29/2009) (6/29/2009)
Ended 12/31/2013 to 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 42.89% 15.70% 92.97%
Market Value 44.19% 15.78% 93.52%
INDEX PERFORMANCE
NASDAQ OMX(R) ABA Community Bank Index(SM) 43.83% 16.46% 98.76%
S&P Composite 1500 Financials Sector Index 34.25% 16.47%
98.79%
Russell 3000(R) Index 33.55% 19.66% 124.51%
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (2/8/2007) Ended (2/8/2007)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 89.79% 10.25% -1.34% 62.86% -8.88%
Market Value 90.80% 10.29% -1.34% 63.17% -8.87%
INDEX PERFORMANCE
NASDAQ(R) Clean Edge(R)
Green Energy Index(SM) 89.34% 10.45% -1.00% 64.37% -6.72%
Russell 2000(R) Index 38.82% 20.08% 6.75% 149.69% 56.87%
131
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FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (6/19/2006) Ended (6/19/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 50.10% 28.54% 18.08% 250.86% 249.73%
Market Value 50.36% 28.64% 18.08% 252.29% 249.73%
INDEX PERFORMANCE
NYSE Arca Biotechnology
Index(SM) 50.80% 29.27% 18.79% 261.03% 266.00%
NASDAQ(R) Biotechnology
Index 66.02% 27.07% 17.54% 231.25% 237.87%
S&P 500(R) Index 32.39% 17.94% 7.73% 128.19% 75.23%
S&P Composite 1500
Health Care Index 42.19% 19.06% 11.07% 139.19% 120.50%
FIRST TRUST S&P REIT INDEX FUND (FRI)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (5/8/2007) Ended (5/8/2007)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 1.82% 16.09% 0.64% 110.85% 4.31%
Market Value 1.82% 16.21% 0.64% 111.97% 4.32%
INDEX PERFORMANCE
S&P United States
REIT Index* 2.40% 16.71% N/A 116.51% N/A
FTSE EPRA/NAREIT
North America Index 1.27% 17.10% 1.06% 120.17% 7.27%
Russell 3000(R) Index 33.55% 18.71% 5.73% 135.71% 44.88%
<FN>
* On November 6, 2008, the Fund's underlying index changed from the S&P REIT
Composite Index to the S&P United States REIT Index. Therefore, the Fund's
performance and historical returns shown for the periods prior to November
6, 2008 are not necessarily indicative of the performance that the Fund,
based on its current Index, would have generated. The inception date of
the Index was June 30, 2008. Returns for the Index are only disclosed for
those periods in which the Index was in existence for the whole period.
</FN>
FIRST TRUST US IPO INDEX FUND (FPX)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (4/12/2006) Ended (4/12/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 47.98% 27.73% 12.16% 240.03% 142.58%
Market Value 47.40% 27.76% 12.17% 240.43% 142.69%
INDEX PERFORMANCE
IPOX(R)-100 U.S. Index 48.88% 28.56% 12.86% 251.21% 154.45%
Russell 3000(R) Index 33.55% 18.71% 7.27% 135.71% 71.91%
132
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FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
Average Annual Total Returns Cumulative Total Returns
Inception Inception
1 Year 5 Years 10 Years (6/12/2003) 5 Years 10 Years (6/12/2003)
Ended Ended Ended to Ended Ended to
12/31/2013 12/31/2013 12/31/2013 12/31/2013 12/31/2013 12/31/2013 12/31/2013
FUND PERFORMANCE
Net Asset Value 39.44% 15.26% 5.25% 5.99% 103.46% 66.85% 84.75%
Market Value 39.68% 15.38% 5.33% 5.99% 104.46% 68.15% 84.86%
INDEX PERFORMANCE
Value Line(R) 100
Index(TM)* 40.93% 16.35% N/A N/A 113.26% N/A N/A
Russell 3000(R) Index 33.55% 18.71% 7.88% 8.77% 135.71% 113.59% 142.78%
<FN>
* On June 15, 2007, the Fund acquired the assets and adopted the financial
and performance history of First Trust Value Line(R) 100 Fund (the
"Predecessor FVL Fund," a closed-end fund), which had an inception date of
June 12, 2003. The inception date total returns at Net Asset Value include
the sales load of $0.675 per share on the initial offering. The investment
goals, strategies and policies of the Fund are substantially similar to
those of the Predecessor FVL Fund. The inception date of the Index was
January 16, 2007. Returns for the Index are only disclosed for those
periods in which the Index was in existence for the entire period. The
cumulative total returns for the period from the reorganization date
(06/15/2007) through period end (12/31/2013) were -25.89% for both Net
Asset Value and Market Value. That compares to an Index return of -23.11%
for that same period. The average annual total returns for the period from
the reorganization date (6/15/2007) through period end (12/31/2013) were
-6.38% for both Net Asset Value and Market Value. That compares to an
Index return of -5.63% for the same period.
Net Asset Value and Market Value returns assume that all dividend
distributions have been reinvested in the Fund at Net Asset Value and
Market Value, respectively. Prior to June 15, 2007, Net Asset Value and
Market Value returns assumed that all dividend distributions were
reinvested at prices obtained by the Dividend Reinvestment Plan of the
Predecessor FVL Fund and the price used to calculate Market Value return
was the AMEX (now known as the NYSE MKT) closing market price of the
Predecessor FVL Fund.
</FN>
133
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FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
Average Annual Total Returns Cumulative Total Returns
Inception Inception
1 Year 5 Years 10 Years (8/19/2003) 5 Years 10 Years (8/19/2003)
Ended Ended Ended to Ended Ended to
12/31/2013 12/31/2013 12/31/2013 12/31/2013 12/31/2013 12/31/2013 12/31/2013
FUND PERFORMANCE
Net Asset Value 26.57% 16.32% 9.02% 9.31% 112.98% 137.18% 151.69%
Market Value 26.72% 16.53% 9.93% 9.32% 114.86% 157.82% 151.93%
INDEX PERFORMANCE
Value Line(R) Dividend
Index(TM)** 27.60% 17.25% N/A N/A 121.58% N/A N/A
S&P 500(R) Index 32.39% 17.94% 7.41% 8.28% 128.19% 104.30% 128.12%
Dow Jones U.S. Select
Dividend Index(SM) 29.06% 16.16% N/A N/A 111.45% N/A N/A
<FN>
** On December 15, 2006, the Fund acquired the assets and adopted the
financial and performance history of First Trust Value Line(R) Dividend
Fund (the "Predecessor FVD Fund," a closed-end fund), which had an
inception date of August 19, 2003. The inception date total returns at Net
Asset Value include the sales load of $0.675 per share on the initial
offering. The investment goals, strategies and policies of the Fund are
substantially similar to those of the Predecessor FVD Fund. The inception
date of the Index was July 3, 2006. Returns for the Index are only
disclosed for those periods in which the Index was in existence for the
entire period. The cumulative total returns for the period from the
reorganization date (12/15/2006) through period end (12/31/2013) were
10.59% and 11.12% at Net Asset Value and Market Value, respectively. That
compares to an Index return of 14.90% for the same period. The average
annual total returns for the period from the reorganization date
(12/15/2006) through period end (12/31/2013) were 2.01% and 2.11% at Net
Asset Value and Market Value, respectively. That compares to an Index
return of 2.80% for the same period.
Net Asset Value and Market Value returns assume that all dividend
distributions have been reinvested in the Fund at Net Asset Value and
Market Value, respectively. Prior to December 15, 2006, Net Asset Value
and Market Value returns assumed that all dividend distributions were
reinvested at prices obtained by the Dividend Reinvestment Plan of the
Predecessor FVD Fund and the price used to calculate Market Value return
was the AMEX (now known as the NYSE MKT) closing market price of the
Predecessor FVD Fund.
</FN>
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
Average Annual Total Returns Cumulative Total Returns
Inception 5 Years Inception
1 Year 5 Years (12/5/2006) Ended (12/5/2006)
Ended 12/31/2013 Ended 12/31/2013 to 12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE
Net Asset Value 34.65% 16.31% 5.11% 112.90% 42.24%
Market Value 34.72% 16.77% 5.11% 117.07% 42.26%
INDEX PERFORMANCE
Value Line(R) Equity
Allocation Index(TM) 35.74% 17.37% 5.98% 122.70% 50.82%
Russell 3000(R) Index 33.55% 18.71% 6.44% 135.71% 55.49%
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single share of each Fund. The total returns represent
the rate that an investor would have earned (or lost) on an investment in a Fund
(assuming reinvestment of all dividends and distributions). The information for
the periods indicated has been derived from financial statements audited by
Deloitte & Touche LLP, whose report for the year ended December 31, 2013, along
with each Fund's financial statements, is included in the Annual Reports to
Shareholders dated December 31, 2013 and is incorporated by reference in the
Funds' SAI, which is available upon request.
134
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST CAPITAL STRENGTH ETF (FTCS)*
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 25.16 $ 21.82 $ 22.90 $ 20.47 $ 14.90
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.45 0.45 0.35 0.39 0.28
Net realized and unrealized gain (loss) 8.54 3.34 (1.01) 2.44 5.57
---------- ---------- ---------- ---------- ----------
Total from investment operations 8.99 3.79 (0.66) 2.83 5.85
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.45) (0.45) (0.42) (0.40) (0.28)
Return of capital -- -- -- (0.00)(a) --
---------- ---------- ---------- ---------- ----------
Total distributions (0.45) (0.45) (0.42) (0.40) (0.28)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 33.70 $ 25.16 $ 21.82 $ 22.90 $ 20.47
========== ========== ========== ========== ==========
TOTAL RETURN (b) 35.90% 17.45% (2.94)% 14.04% 39.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 65,706 $ 32,707 $ 31,643 $ 36,633 $ 51,164
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.76% 0.83% 0.82% 0.86% 0.87%
Ratio of net expenses to average net assets 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income (loss) to
average net assets 1.59% 1.84% 1.51% 1.58% 1.57%
Portfolio turnover rate (c) 156% 84% 114% 197% 171%
* Formerly First Trust Strategic Value Index Fund
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
135
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Download Table]
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND (VIXH)
FOR THE PERIOD
FOR THE 8/29/2012 (a)
YEAR ENDED THROUGH
12/31/2013 12/31/2012
------------ ------------
Net asset value, beginning of period $ 19.51 $ 19.89
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.34 0.11
Net realized and unrealized gain (loss) 3.34 (0.38)
---------- ----------
Total from investment operations 3.68 (0.27)
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.33) (0.11)
---------- ----------
Net asset value, end of period $ 22.86 $ 19.51
========== ==========
TOTAL RETURN (b) 19.00% (1.37)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 5,716 $ 2,927
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.60% 0.60%(c)
Ratio of net expenses to average net assets 0.60% 0.60%(c)
Ratio of net investment income (loss) to
average net assets 1.53% 1.97%(c)
Portfolio turnover rate (d) 4% 2%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
136
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST DOW JONES INTERNET INDEX FUND (FDN)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 39.01 $ 32.28 $ 34.27 $ 25.11 $ 14.01
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.11) (0.08) (0.10) 0.04 (0.05)
Net realized and unrealized gain (loss) 20.94 6.81 (1.87) 9.16 11.15
---------- ---------- ---------- ---------- ----------
Total from investment operations 20.83 6.73 (1.97) 9.20 11.10
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income -- -- (0.02) (0.04) --
Return of capital -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions -- -- (0.02) (0.04) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 59.84 $ 39.01 $ 32.28 $ 34.27 $ 25.11
========== ========== ========== ========== ==========
TOTAL RETURN (a) 53.40% 20.85% (5.74)% 36.63% 79.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,929,852 $ 557,882 $ 519,683 $ 589,480 $ 86,615
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.57% 0.60% 0.60% 0.66% 0.73%
Ratio of net expenses to average net assets 0.57% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets (0.28)% (0.23)% (0.25)% 0.26% (0.46)%
Portfolio turnover rate (b) 17% 33% 18% 16% 35%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
137
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND (FDM)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 22.87 $ 20.09 $ 22.17 $ 17.70 $ 14.74
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.25 0.35 0.10 0.09 0.09
Net realized and unrealized gain (loss) 9.62 2.83 (2.02) 4.46 2.97
---------- ---------- ---------- ---------- ----------
Total from investment operations 9.87 3.18 (1.92) 4.55 3.06
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.27) (0.40) (0.16) (0.08) (0.10)
Return of capital -- -- -- -- (0.00) (a)
---------- ---------- ---------- ---------- ----------
Total distribution (0.27) (0.40) (0.16) (0.08) (0.10)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 32.47 $ 22.87 $ 20.09 $ 22.17 $ 17.70
========== ========== ========== ========== ==========
TOTAL RETURN (b) 43.32% 15.86% (8.69)% 25.77% 20.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 91,080 $ 41,281 $ 52,328 $ 153,050 $ 18,679
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.72% 0.76% 0.71% 0.86% 0.94%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.93% 1.38% 0.40% 0.94% 0.69%
Portfolio turnover rate (c) 70% 71% 59% 86% 86%
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
138
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST ISE CHINDIA INDEX FUND (FNI)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 20.97 $ 18.23 $ 25.01 $ 21.28 $ 11.78
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.20 0.35 0.27 0.17 0.09
Net realized and unrealized gain (loss) 7.26 2.74 (6.75) 3.73 9.50
---------- ---------- ---------- ---------- ----------
Total from investment operations 7.46 3.09 (6.48) 3.90 9.59
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.21) (0.35) (0.30) (0.17) (0.09)
Return of capital -- -- -- -- (0.00)(a)
---------- ---------- ---------- ---------- ----------
Total distributions (0.21) (0.35) (0.30) (0.17) (0.09)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 28.22 $ 20.97 $ 18.23 $ 25.01 $ 21.28
========== ========== ========== ========== ==========
TOTAL RETURN (b) 35.81% 17.11% (26.02)% 18.46% 81.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 71,962 $ 66,066 $ 79,287 $ 176,352 $ 120,240
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.66% 0.73% 0.66% 0.66% 0.73%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.79% 1.60% 1.00% 0.74% 0.58%
Portfolio turnover rate (c) 40% 29% 23% 34% 47%
(a) Amount represents less than $0.01 share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
139
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND (FCG)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 15.67 $ 18.19 $ 19.60 $ 17.52 $ 11.80
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.07 0.07 0.08 0.03 0.07
Net realized and unrealized gain (loss) 3.86 (2.52) (1.41) 2.10 5.72
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.93 (2.45) (1.33) 2.13 5.79
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.07) (0.07) (0.08) (0.05) (0.07)
Return of capital -- -- -- (0.00)(a) (0.00)(a)
---------- ---------- ---------- ---------- ----------
Total distributions (0.07) (0.07) (0.08) (0.05) (0.07)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 19.53 $ 15.67 $ 18.19 $ 19.60 $ 17.52
========== ========== ========== ========== ==========
TOTAL RETURN (b) 25.13% (13.51)% (6.85)% 12.22% 49.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 464,795 $ 387,899 $ 346,556 $ 396,893 $ 464,339
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.60% 0.63% 0.63% 0.65% 0.72%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.40% 0.40% 0.39% 0.19% 0.53%
Portfolio turnover rate (c) 49% 41% 43% 93% 71%
(a) Amount represents less than $0.01 share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
140
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST ISE WATER INDEX FUND (FIW)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 25.99 $ 20.71 $ 22.13 $ 18.66 $ 15.69
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.21 0.23 0.16 0.18 0.19
Net realized and unrealized gain (loss) 7.80 5.30 (1.39) 3.43 2.97
---------- ---------- ---------- ---------- ----------
Total from investment operations 8.01 5.53 (1.23) 3.61 3.16
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.21) (0.25) (0.19) (0.14) (0.19)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 33.79 $ 25.99 $ 20.71 $ 22.13 $ 18.66
========== ========== ========== ========== ==========
TOTAL RETURN (a) 30.91% 26.83% (5.62)% 19.49% 20.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 197,643 $ 72,769 $ 57,986 $ 53,111 $ 37,314
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.60% 0.63% 0.64% 0.69% 0.72%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.75% 1.02% 0.79% 0.96% 1.20%
Portfolio turnover rate (b) 45% 31% 31% 38% 44%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
[Enlarge/Download Table]
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND (FDL)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 18.46 $ 17.57 $ 15.92 $ 14.27 $ 13.09
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.69 0.71 0.61 0.57 0.56
Net realized and unrealized gain (loss) 3.47 0.89 1.65 1.66 1.19
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.16 1.60 2.26 2.23 1.75
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.69) (0.71) (0.61) (0.58) (0.57)
Return of capital -- -- -- (0.00)(a) --
---------- ---------- ---------- ---------- ----------
Total distributions (0.69) (0.71) (0.61) (0.58) (0.57)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 21.93 $ 18.46 $ 17.57 $ 15.92 $ 14.27
========== ========== ========== ========== ==========
TOTAL RETURN (b) 22.71% 9.14% 14.44% 16.05% 14.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 687,437 $ 545,517 $ 447,030 $ 143,294 $ 48,505
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.49% 0.51% 0.56% 0.66% 0.79%
Ratio of net expenses to average net assets 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of net investment income (loss) to
average net assets 3.61% 3.88% 3.98% 4.22% 4.64%
Portfolio turnover rate (c) 35% 31% 27% 30% 81%
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
141
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND (QQEW)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 26.10 $ 22.98 $ 23.74 $ 19.69 $ 12.37
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.17 0.27 0.05 0.15 0.05
Net realized and unrealized gain (loss) 10.25 3.14 (0.70) 4.02 7.32
---------- ---------- ---------- ---------- ----------
Total from investment operations 10.42 3.41 (0.65) 4.17 7.37
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.17) (0.29) (0.11) (0.12) (0.05)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 36.35 $ 26.10 $ 22.98 $ 23.74 $ 19.69
========== ========== ========== ========== ==========
TOTAL RETURN (a) 39.95% 14.86% (2.77)% 21.25% 59.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 288,945 $ 84,815 $ 73,539 $ 75,955 $ 40,369
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.63% 0.68% 0.68% 0.75% 0.67%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.60% 1.01% 0.23% 0.79% 0.35%
Portfolio turnover rate (b) 38% 34% 27% 24% 36%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
142
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND (QQXT)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 24.70 $ 20.80 $ 21.10 $ 17.63 $ 12.05
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.10 0.31 0.06 0.17 0.05
Net realized and unrealized gain (loss) 10.06 3.92 (0.28) 3.46 5.58
---------- ---------- ---------- ---------- ----------
Total from investment operations 10.16 4.23 (0.22) 3.63 5.63
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.09) (0.33) (0.08) (0.16) (0.05)
Return of capital -- -- -- -- (0.00)(a)
---------- ---------- ---------- ---------- ----------
Total distributions (0.09) (0.33) (0.08) (0.16) (0.05)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 34.77 $ 24.70 $ 20.80 $ 21.10 $ 17.63
========== ========== ========== ========== ==========
TOTAL RETURN (b) 41.24% 20.31% (1.08)% 20.64% 46.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 90,396 $ 41,982 $ 30,157 $ 22,151 $ 10,579
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.67% 0.76% 0.78% 0.94% 1.28%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.38% 1.34% 0.31% 1.02% 0.48%
Portfolio turnover rate (c) 33% 40% 37% 19% 43%
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
143
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND (QTEC)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 25.86 $ 24.14 $ 25.69 $ 21.16 $ 11.77
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.24 0.19 0.00 (a) (d) 0.10 0.01
Net realized and unrealized gain (loss) 9.59 1.74 (1.47) 4.53 9.39
---------- ---------- ---------- ---------- ----------
Total from investment operations 9.83 1.93 (1.47) 4.63 9.40
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.26) (0.21) (0.08) (0.10) (0.01)
Return of capital -- -- -- -- (0.00) (a)
---------- ---------- ---------- ---------- ----------
Total distributions (0.26) (0.21) (0.08) (0.10) (0.01)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 35.43 $ 25.86 $ 24.14 $ 25.69 $ 21.16
========== ========== ========== ========== ==========
TOTAL RETURN (b) 38.12% 8.02% (5.75)% 21.92% 79.89%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 177,165 $ 106,008 $ 149,660 $ 453,416 $ 86,766
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.62% 0.65% 0.63% 0.70% 0.67%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income to average
net assets 0.80% 0.63% (0.02)% 0.71% 0.16%
Portfolio turnover rate (c) 33% 26% 21% 26% 35%
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
(d) Per share amounts have been calculated using the average share method.
144
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND (QABA)
FOR THE PERIOD
FOR THE FOR THE FOR THE FOR THE 6/29/2009 (a)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 25.56 $ 22.97 $ 24.95 $ 22.41 $ 20.00
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.37 0.48 0.37 0.30 0.16
Net realized and unrealized gain (loss) 10.55 2.62 (1.98) 2.55 2.40
---------- ---------- ---------- ---------- ----------
Total from investment operations 10.92 3.10 (1.61) 2.85 2.56
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.37) (0.51) (0.37) (0.31) (0.15)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 36.11 $ 25.56 $ 22.97 $ 24.95 $ 22.41
========== ========== ========== ========== ==========
TOTAL RETURN (B) 42.89% 13.52% (6.48)% 12.77% 12.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 52,362 $ 8,945 $ 12,634 $ 9,979 $ 5,604
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.76% 1.04% 0.96% 1.16% 2.67% (c)
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60% (c)
Ratio of net investment income to average
net assets 1.38% 1.90% 1.62% 1.40% 1.92% (c)
Portfolio turnover rate (d) 29% 17% 29% 26% 15%
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FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND (QCLN)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 9.48 $ 9.65 $ 16.42 $ 16.09 $ 11.19
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.07 0.13 (0.03) (0.01) (0.02)
Net realized and unrealized gain (loss) 8.42 (0.18) (6.74) 0.34 4.92
---------- ---------- ---------- ---------- ----------
Total from investment operations 8.49 (0.05) (6.77) 0.33 4.90
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.07) (0.12) -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.90 $ 9.48 $ 9.65 $ 16.42 $ 16.09
========== ========== ========== ========== ==========
TOTAL RETURN (b) 89.79% (0.50)% (41.23)% 2.05% 43.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 97,574 $ 13,740 $ 20,740 $ 36,120 $ 43,449
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.70% 0.98% 0.77% 0.78% 0.81%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.60% 1.19% (0.18)% (0.07)% (0.12)%
Portfolio turnover rate (d) 49% 24% 22% 22% 40%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
145
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
[Enlarge/Download Table]
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND (FBT)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 46.05 $ 32.68 $ 39.07 $ 28.54 $ 19.70
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.10) (0.22) (0.30) (0.17) (0.16)
Net realized and unrealized gain (loss) 23.17 13.59 (6.09) 10.70 9.00
---------- ---------- ---------- ---------- ----------
Total from investment operations 23.07 13.37 (6.39) 10.53 8.84
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 69.12 $ 46.05 $ 32.68 $ 39.07 $ 28.54
========== ========== ========== ========== ==========
TOTAL RETURN (a) 50.10% 40.91% (16.36)% 36.90% 44.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 953,910 $ 239,445 $ 183,030 $ 201,220 $ 67,068
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.60% 0.61% 0.61% 0.66% 0.72%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets (0.26)% (0.48)% (0.54)% (0.60)% (0.60)%
Portfolio turnover rate (b) 48% 39% 44% 35% 44%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
146
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST S&P REIT INDEX FUND (FRI)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 17.75 $ 15.47 $ 14.65 $ 11.72 $ 9.43
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.52 0.38 0.28 0.29 0.25
Net realized and unrealized gain (loss) (0.19) 2.30 0.88 2.94 2.31
---------- ---------- ---------- ---------- ----------
Total from investment operations 0.33 2.68 1.16 3.23 2.56
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.54) (0.37) (0.34) (0.30) (0.25)
Net realized gain -- (0.03) -- -- --
Return of capital -- -- -- -- (0.02)
---------- ---------- ---------- ---------- ----------
Total distributions (0.54) (0.40) (0.34) (0.30) (0.27)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.54 $ 17.75 $ 15.47 $ 14.65 $ 11.72
========== ========== ========== ========== ==========
TOTAL RETURN (a) 1.82% 17.39% 7.90% 27.73% 28.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 148,210 $ 402,888 $ 324,961 $ 71,066 $ 21,087
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.50% 0.50% 0.57% 0.69% 1.95%
Ratio of net expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income (loss) to
average net assets 2.31% 2.15% 2.03% 2.60% 3.39%
Portfolio turnover rate (b) 11% 8% 9% 16% 13%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
147
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST US IPO INDEX FUND (FPX)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 30.82 $ 23.99 $ 23.51 $ 20.08 $ 14.09
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.22 0.31 0.18 0.20 0.59
Net realized and unrealized gain (loss) 14.53 6.87 0.55 3.45 5.72
---------- ---------- ---------- ---------- ----------
Total from investment operations 14.75 7.18 0.73 3.65 6.31
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.23) (0.35) (0.25) (0.22) (0.32)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 45.34 $ 30.82 $ 23.99 $ 23.51 $ 20.08
========== ========== ========== ========== ==========
TOTAL RETURN (a) 47.98% 30.01% 3.11% 18.28% 44.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 351,376 $ 24,659 $ 15,594 $ 15,283 $ 11,043
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.66% 1.01% 1.01% 1.32% 1.34%
Ratio of net expenses to average net assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment income (loss) to
average net assets 0.69% 1.27% 0.70% 1.28% 3.59%
Portfolio turnover rate (b) 30% 48% 44% 43% 30%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
148
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND (FVL)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 13.27 $ 12.37 $ 13.52 $ 10.44 $ 9.26
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.06 0.15 0.08 0.00 (a) (0.01)
Net realized and unrealized gain (loss) 5.17 0.90 (1.15) 3.08 1.19
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.23 1.05 (1.07) 3.08 1.18
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.06) (0.15) (0.08) -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 18.44 $ 13.27 $ 12.37 $ 13.52 $ 10.44
========== ========== ========== ========== ==========
TOTAL RETURN (b) 39.44% 8.53% (7.92)% 29.50% 12.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 56,058 $ 45,635 $ 55,543 $ 88,431 $ 60,433
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.87% 0.87% 0.82% 0.87% 0.85%
Ratio of net expenses to average net assets 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment income (loss) to
average net assets 0.35% 1.03% 0.47% 0.01% (0.08)%
Portfolio turnover rate (c) 350% 304% 202% 266% 235%
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
149
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND (FVD)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 17.29 $ 16.01 $ 15.08 $ 13.37 $ 11.55
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.50 0.50 0.42 0.41 (a) 0.38
Net realized and unrealized gain (loss) 4.06 1.28 0.93 1.71 1.82
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.56 1.78 1.35 2.12 2.20
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.49) (0.50) (0.42) (0.40) (0.38)
Return of capital -- -- -- (0.01) --
---------- ---------- ---------- ---------- ----------
Total distributions to shareholders (0.49) (0.50) (0.42) (0.41) (0.38)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 21.36 $ 17.29 $ 16.01 $ 15.08 $ 13.37
========== ========== ========== ========== ==========
TOTAL RETURN (b) 26.57% 11.17% 9.03% 16.08% 19.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 796,361 $ 508,103 $ 366,399 $ 218,510 $ 153,618
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.76% 0.78% 0.79% 0.84% 0.80%
Ratio of net expenses to average net assets 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment income (loss) to
average net assets 2.57% 3.03% 2.84% 2.94% 3.30%
Portfolio turnover rate (c) 71% 54% 53% 55% 101%
(a) Per share amounts have been calculated using the average share method.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(c) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
150
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND (FVI)
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 19.34 $ 18.16 $ 20.30 $ 17.21 $ 12.98
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.21 0.34 0.21 0.29 0.18
Net realized and unrealized gain (loss) 6.47 1.24 (2.14) 3.09 4.23
---------- ---------- ---------- ---------- ----------
Total from investment operations 6.68 1.58 (1.93) 3.38 4.41
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.22) (0.40) (0.21) (0.29) (0.18)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 25.80 $ 19.34 $ 18.16 $ 20.30 $ 17.21
========== ========== ========== ========== ==========
TOTAL RETURN (a) 34.65% 8.74% (9.56)% 19.85% 34.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 5,160 $ 3,868 $ 6,357 $ 7,106 $ 6,885
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 2.01% 1.85% 1.39% 1.35% 1.24%
Ratio of net expenses to average net assets 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment income (loss) to
average net assets 0.91% 1.64% 1.05% 1.29% 1.24%
Portfolio turnover rate (b) 186% 203% 184% 205% 191%
(a) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the investment
advisor.
(b) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
OTHER INFORMATION
CONTINUOUS OFFERING
Each Fund will issue, on a continuous offering basis, its shares in one or
more groups of a fixed number of Fund shares (each such group of such specified
number of individual Fund shares, a "Creation Unit Aggregation"). The method by
which Creation Unit Aggregations of Fund shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of shares are issued and sold by a Fund on an ongoing basis, a
"distribution," as such term is used in the Securities Act, may occur at any
point. Broker-dealers and other persons are cautioned that some activities on
their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
FTP, breaks them down into constituent shares and sells such shares directly to
customers, or if it chooses to couple the creation of a supply of new shares
with an active selling effort involving solicitation of secondary market demand
for shares. A determination of whether one is an underwriter for purposes of the
Securities Act must take into account all the facts and circumstances pertaining
to the activities of the broker-dealer or its client in the particular case, and
the examples mentioned above should not be considered a complete description of
all the activities that could lead to a characterization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters"
but are effecting transactions in shares, whether or not participating in the
distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(a)(3) of the Securities
Act is not available in respect of such transactions as a result of Section
24(d) of the 1940 Act. The Trust, on behalf of each Fund, however, has received
from the Securities and Exchange Commission an exemption from the prospectus
delivery obligation in ordinary secondary market transactions under certain
circumstances, on the condition that purchasers are provided with a product
151
description of the shares. As a result, broker-dealer firms should note that
dealers who are not underwriters but are participating in a distribution (as
contrasted with ordinary secondary market transactions) and thus dealing with
the shares that are part of an overallotment within the meaning of Section
4(a)(3)(C) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to shares are
reminded that, under the Securities Act Rule 153, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer
in connection with a sale on the Exchange is satisfied by the fact that the
prospectus is available from the Exchange upon request. The prospectus delivery
mechanism provided in Rule 153 is available with respect to transactions on a
national securities exchange, a trading facility or an alternative trading
system.
152
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153
FIRST TRUST EXCHANGE-TRADED FUND
--------------------------------------------------------------------------------
First Trust Capital Strength ETF
First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund
First Trust Dow Jones Internet Index Fund
First Trust Dow Jones Select MicroCap Index Fund
First Trust ISE Chindia Index Fund
First Trust ISE-Revere Natural Gas Index Fund
First Trust ISE Water Index Fund
First Trust Morningstar Dividend Leaders Index Fund
First Trust NASDAQ-100 Equal Weighted Index Fund
First Trust NASDAQ-100 Ex-Technology Sector Index Fund
First Trust NASDAQ-100-Technology Sector Index Fund
First Trust NASDAQ(R) ABA Community Bank Index Fund
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
First Trust NYSE Arca Biotechnology Index Fund
First Trust S&P REIT Index Fund
First Trust US IPO Index Fund
First Trust Value Line(R) 100 Exchange-Traded Fund
First Trust Value Line(R) Dividend Index Fund
First Trust Value Line(R) Equity Allocation Index Fund
FOR MORE INFORMATION
For more detailed information on the Funds, several additional sources of
information are available to you. The SAI, incorporated by reference into this
prospectus, contains detailed information on the Funds' policies and operation.
Additional information about the Funds' investments is available in the annual
and semi-annual reports to shareholders. In the Funds' annual reports, you will
find a discussion of the market conditions and investment strategies that
significantly impacted the Funds' performance during the last fiscal year. The
Funds' most recent SAI, annual and semi-annual reports and certain other
information are available free of charge by calling the Funds at (800) 621-1675,
on the Funds' website at www.ftportfolios.com or through your financial advisor.
Shareholders may call the toll-free number above with any inquiries.
You may obtain this and other information regarding the Funds, including the
Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the
Securities and Exchange Commission (the "SEC"). Information on the SEC's website
is free of charge. Visit the SEC's on-line EDGAR database at http://www.sec.gov
or in person at the SEC's Public Reference Room in Washington, D.C., or call the
SEC at (202) 551-8090 for information on the Public Reference Room. You may also
request information regarding the Funds by sending a request (along with a
duplication fee) to the SEC's Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-1520 or by sending an electronic request to
publicinfo@sec.gov.
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675 SEC File #: 333-125751
www.ftportfolios.com 811-21774
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-21774
FIRST TRUST EXCHANGE-TRADED FUND
[Download Table]
TICKER
FUND NAME SYMBOL EXCHANGE
--------- ------ --------
FIRST TRUST CAPITAL STRENGTH ETF FTCS NASDAQ(R)
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND VIXH NYSE ARCA
FIRST TRUST DOW JONES INTERNET INDEX FUND FDN NYSE ARCA
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND FDM NYSE ARCA
FIRST TRUST ISE CHINDIA INDEX FUND FNI NYSE ARCA
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND FCG NYSE ARCA
FIRST TRUST ISE WATER INDEX FUND FIW NYSE ARCA
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND FDL NYSE ARCA
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND QQEW NASDAQ(R)
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND QQXT NASDAQ(R)
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND QTEC NASDAQ(R)
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND QABA NASDAQ(R)
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND QCLN NASDAQ(R)
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND FBT NYSE ARCA
FIRST TRUST S&P REIT INDEX FUND FRI NYSE ARCA
FIRST TRUST US IPO INDEX FUND FPX NYSE ARCA
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND FVL NYSE ARCA
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND FVD NYSE ARCA
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND FVI NYSE ARCA
DATED MAY 1, 2014
This Statement of Additional Information ("SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated May 1, 2014, as it may
be revised from time to time (the "Prospectus") for First Trust Capital Strength
ETF, First Trust CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund, First Trust Dow
Jones Internet Index Fund, First Trust Dow Jones Select MicroCap Index Fund,
First Trust ISE Chindia Index Fund, First Trust ISE-Revere Natural Gas Index
Fund, First Trust ISE Water Index Fund, First Trust Morningstar Dividend Leaders
Index Fund, First Trust NASDAQ-100 Equal Weighted Index Fund, First Trust
NASDAQ-100 Ex-Technology Sector Index Fund, First Trust NASDAQ-100-Technology
Sector Index Fund, First Trust NASDAQ(R) ABA Community Bank Index Fund, First
Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund, First Trust NYSE Arca
Biotechnology Index Fund, First Trust S&P REIT Index Fund, First Trust US IPO
Index Fund, First Trust Value Line(R) 100 Exchange-Traded Fund, First Trust
Value Line(R) Dividend Index Fund and First Trust Value Line(R) Equity
Allocation Index Fund (each a "Fund" and collectively, the "Funds"), each a
series of the First Trust Exchange-Traded Fund (the "Trust"). Capitalized terms
used herein that are not defined have the same meaning as in the Prospectus,
unless otherwise noted. A copy of the Prospectus may be obtained without charge
by writing to the Trust's distributor, First Trust Portfolios L.P., 120 East
Liberty Drive, Suite 400, Wheaton, Illinois 60187, or by calling toll free at
(800) 621-1675.
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS.................................1
EXCHANGE LISTING AND TRADING...................................................3
INVESTMENT OBJECTIVES AND POLICIES.............................................4
INVESTMENT STRATEGIES..........................................................6
SUBLICENSE AGREEMENTS.........................................................18
INVESTMENT RISKS..............................................................30
MANAGEMENT OF THE FUNDS.......................................................36
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE......................................53
BROKERAGE ALLOCATIONS.........................................................53
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX
PROVIDERS AND EXCHANGES....................................................57
ADDITIONAL INFORMATION........................................................60
PROXY VOTING POLICIES AND PROCEDURES..........................................62
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS.........................63
FEDERAL TAX MATTERS...........................................................74
DETERMINATION OF NET ASSET VALUE..............................................80
DIVIDENDS AND DISTRIBUTIONS...................................................82
MISCELLANEOUS INFORMATION.....................................................82
FINANCIAL STATEMENTS..........................................................83
APPENDIX A - BENEFICIAL OWNERSHIP TABLE......................................A-1
APPENDIX B ..................................................................B-1
-ii-
The audited financial statements for the Funds' most recent fiscal year
appear in the Funds' Annual Reports to Shareholders dated December 31, 2013. The
Annual Reports were filed with the Securities and Exchange Commission ("SEC") on
February 27, 2014. The financial statements from such Annual Reports are
incorporated herein by reference. The Annual Reports are available without
charge by calling (800) 621-1675 or by visiting the SEC's website at
http://www.sec.gov.
-iii-
GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS
The Trust was organized as a Massachusetts business trust on August 8,
2003 and is authorized to issue an unlimited number of shares in one or more
series or "Funds." The Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Trust currently offers shares in 19 separate series, including the
First Trust Capital Strength ETF (the "Capital Strength ETF"), First Trust
CBOE(R) S&P 500(R) VIX(R) Tail Hedge Fund (the "Tail Hedge Fund"), First Trust
Dow Jones Internet Index Fund (the "Internet Fund"), First Trust Dow Jones
Select MicroCap Index Fund (the "MicroCap Fund"), First Trust ISE Chindia Index
Fund (the "ISE Chindia Fund"), First Trust ISE-Revere Natural Gas Index Fund
(the "ISE Gas Fund"), First Trust ISE Water Index Fund (the "ISE Water Fund"),
First Trust Morningstar Dividend Leaders Index Fund (the "Dividend Leaders
Fund"), First Trust NASDAQ-100 Equal Weighted Index Fund (the "Equal Weighted
Fund"), First Trust NASDAQ-100 Ex-Technology Sector Index Fund (the
"Ex-Technology Fund"), First Trust NASDAQ-100-Technology Sector Index Fund (the
"Technology Fund"), First Trust NASDAQ(R) ABA Community Bank Index Fund (the
"Community Bank Fund"), First Trust NASDAQ(R) Clean Edge(R) Green Energy Index
Fund (the "Clean Edge(R) Fund"), First Trust NYSE Arca Biotechnology Index Fund
(the "Biotech Fund"), First Trust S&P REIT Index Fund (the "S&P REIT Fund"),
First Trust US IPO Index Fund (the "US IPO Fund"), First Trust Value Line(R) 100
Exchange-Traded Fund (the "Value Line(R) 100 Fund"), First Trust Value Line(R)
Dividend Index Fund (the "Value Line(R) Dividend Fund") and First Trust Value
Line(R) Equity Allocation Index Fund (the "Value Line(R) Equity Allocation
Fund"). On June 4, 2013, First Trust Strategic Value Index Fund changed its name
to First Trust Capital Strength ETF pursuant to the approval of the Board of
Trustees of the Trust. Prior to June 18, 2010, First Trust Strategic Value Index
Fund was named First Trust DB Strategic Value Index Fund. The Tail Hedge Fund,
the Internet Fund, the ISE Chindia Fund, the Dividend Leaders Fund, the Clean
Edge(R) Fund, the Biotech Fund, and the US IPO Fund are non-diversified series,
while the Capital Strength ETF, the MicroCap Fund, the ISE Gas Fund, the ISE
Water Fund, the Equal Weighted Fund, the Ex-Technology Fund, the Technology
Fund, the Community Bank Fund, the S&P REIT Fund, the Value Line(R) 100 Fund,
the Value Line(R) Dividend Fund and the Value Line(R) Equity Allocation Fund are
diversified series.
This SAI relates to all of the Funds. Each Fund, as a series of the Trust,
represents a beneficial interest in a separate portfolio of securities and other
assets, with its own objective and policies.
The Board of Trustees of the Trust (the "Board of Trustees" or the
"Trustees") has the right to establish additional series in the future, to
determine the preferences, voting powers, rights and privileges thereof and to
modify such preferences, voting powers, rights and privileges without
shareholder approval. Shares of any series may also be divided into one or more
classes at the discretion of the Trustees.
The Trust or any series or class thereof may be terminated at any time by
the Board of Trustees upon written notice to the shareholders.
Each share has one vote with respect to matters upon which a shareholder
vote is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all series of the Trust vote together as a
single class except as otherwise required by the 1940 Act, or if the matter
being voted on affects only a particular series, and, if a matter affects a
particular series differently from other series, the shares of that series will
vote separately on such matter.
The Trust's Declaration of Trust (the "Declaration") provides that by
becoming a shareholder of a Fund, each shareholder shall be expressly held to
have agreed to be bound by the provisions of the Declaration. The Declaration
may, except in limited circumstances, be amended by the Trustees without a
shareholder vote. The holders of Fund shares are required to disclose
information on direct or indirect ownership of Fund shares as may be required to
comply with various laws applicable to the Funds, and ownership of Fund shares
may be disclosed by the Funds if so required by law or regulation. In addition,
pursuant to the Declaration, the Trustees may, in their discretion, require the
Trust to redeem shares held by any shareholder for any reason under terms set by
the Trustees. The Declaration also provides that shareholders may not bring suit
on behalf of a Fund without first requesting that the Trustees bring such suit
unless there would be irreparable injury to the Fund, or if a majority of the
Trustees have a personal financial interest in the action. Trustees are not
considered to have a personal financial interest by virtue of being compensated
for their services as Trustees.
The Trust is not required to and does not intend to hold annual meetings
of shareholders.
Under Massachusetts law applicable to Massachusetts business trusts,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees. The Declaration further provides for indemnification out of the assets
and property of the Trust for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust or a Fund itself was unable to meet its obligations.
The Funds are advised by First Trust Advisors L.P. (the "Advisor" or
"First Trust").
The shares of the Tail Hedge Fund, the Internet Fund, the MicroCap Fund,
the ISE Chindia Fund, the ISE Gas Fund, the ISE Water Fund, the Dividend Leaders
Fund, the Biotech Fund, the S&P REIT Fund, the US IPO Fund, the Value Line(R)
100 Fund, the Value Line(R) Dividend Fund and the Value Line(R) Equity
Allocation Fund list and principally trade on NYSE Arca, Inc., an affiliate of
NYSE Euronext, Inc. ("NYSE Arca"). The shares of the Capital Strength ETF, the
Equal Weighted Fund, the Ex-Technology Fund, the Technology Fund, the Community
Bank Fund and the Clean Edge(R) Fund list and principally trade on The NASDAQ(R)
Stock Market, LLC ("NASDAQ(R)"). The shares will trade on NYSE Arca or NASDAQ(R)
at market prices that may be below, at or above net asset value. The Funds offer
and issue shares at net asset value only in aggregations of a specified number
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of shares (each a "Creation Unit" or a "Creation Unit Aggregation"), generally
in exchange for a basket of securities (the "Deposit Securities") included in
each Fund's corresponding Index (as hereinafter defined), together with the
deposit of a specified cash payment (the "Cash Component"). Shares are
redeemable only in Creation Unit Aggregations and, generally, in exchange for
portfolio securities and a specified cash payment. Creation Units are
aggregations of 50,000 shares of a Fund.
The Trust reserves the right to permit creations and redemptions of Fund
shares to be made in whole or in part on a cash basis under certain
circumstances. Fund shares may be issued in advance of receipt of Deposit
Securities subject to various conditions including a requirement to maintain on
deposit with the applicable Fund cash at least equal to 115% of the market value
of the missing Deposit Securities. See the "Creation and Redemption of Creation
Unit Aggregations" section. In each instance of such cash creations or
redemptions, transaction fees may be imposed that will be higher than the
transaction fees associated with in-kind creations or redemptions. In all cases,
such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of NYSE Arca or NASDAQ(R)
necessary to maintain the listing of shares of a Fund will continue to be met.
NYSE Arca and/or NASDAQ(R) may, but are not required to, remove the shares of a
Fund from listing if (i) following the initial 12-month period beginning at the
commencement of trading of a Fund, there are fewer than 50 beneficial owners of
the shares of such Fund for 30 or more consecutive trading days; (ii) the value
of such Fund's Index (as defined below) is no longer calculated or available; or
(iii) such other event shall occur or condition exist that, in the opinion of
NYSE Arca or NASDAQ(R) makes further dealings on NYSE Arca or NASDAQ(R),
respectively, inadvisable. Please note that NYSE Arca may have a conflict of
interest with respect to the Tail Hedge Fund, the Biotech Fund, the Community
Bank Fund, the Value Line(R) 100 Fund, the Value Line(R) Dividend Fund and the
Value Line(R) Equity Allocation Fund because shares of such Funds are listed on
NYSE Arca and NYSE Arca is also each such Fund's index calculation agent (and in
the case of the Biotech Fund, its Index Provider as well). Additionally,
NASDAQ(R) may have a conflict of interest with respect to the Capital Strength
ETF, the Equal Weighted Fund, the Ex-Technology Fund, the Technology Fund, the
Community Bank Fund and the Clean Edge(R) Fund because shares of such Funds are
listed on NASDAQ(R) and NASDAQ(R) is also each such Fund's Index Provider. NYSE
Arca or NASDAQ(R) will remove the shares of a Fund from listing and trading upon
termination of such Fund.
As in the case of other stocks traded on NYSE Arca or NASDAQ(R), brokers'
commissions on transactions will be based on negotiated commission rates at
customary levels.
The Funds reserve the right to adjust the price levels of shares in the
future to help maintain convenient trading ranges for investors. Any adjustments
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of each Fund.
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INVESTMENT OBJECTIVES AND POLICIES
The Prospectus describes the investment objectives and certain policies of
the Funds. The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of the Funds.
Each Fund is subject to the following fundamental policies, which may not
be changed without approval of the holders of a majority of the outstanding
voting securities (as such term is defined in the 1940 Act) of the Fund:
(1) A Fund may not issue senior securities, except as permitted
under the 1940 Act.
(2) A Fund may not borrow money, except that a Fund may (i) borrow
money from banks for temporary or emergency purposes (but not for leverage
or the purchase of investments); and (ii) engage in other transactions
permissible under the 1940 Act that may involve a borrowing (such as
obtaining short-term credits as are necessary for the clearance of
transactions, engaging in delayed-delivery transactions, or purchasing
certain futures, forward contracts and options), provided that the
combination of (i) and (ii) shall not exceed 33-1/3% of the value of a
Fund's total assets (including the amount borrowed), less a Fund's
liabilities (other than borrowings).
(3) A Fund will not underwrite the securities of other issuers
except to the extent the Fund may be considered an underwriter under the
Securities Act of 1933, as amended (the "1933 Act"), in connection with
the purchase and sale of portfolio securities.
(4) A Fund will not purchase or sell real estate or interests
therein, unless acquired as a result of ownership of securities or other
instruments (but this shall not prohibit a Fund from purchasing or selling
securities or other instruments backed by real estate or of issuers
engaged in real estate activities).
(5) A Fund may not make loans to other persons, except through (i)
the purchase of debt securities permissible under a Fund's investment
policies, (ii) repurchase agreements, or (iii) the lending of portfolio
securities, provided that no such loan of portfolio securities may be made
by a Fund if, as a result, the aggregate of such loans would exceed
33-1/3% of the value of a Fund's total assets.
(6) A Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments (but
this shall not prevent a Fund from purchasing or selling options, futures
contracts, forward contracts or other derivative instruments, or from
investing in securities or other instruments backed by physical
commodities).
(7) A Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry or group of
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industries, except to the extent that the Index that a Fund is based upon,
concentrates in an industry or a group of industries. This restriction
does not apply to obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
(8) The Capital Strength ETF, the MicroCap Fund, the ISE Gas Fund,
the ISE Water Fund, the Equal Weighted Fund, the Ex-Technology Fund, the
Technology Fund, the Community Bank Fund, the S&P REIT Fund, the Value
Line(R) 100 Fund, the Value Line(R) Dividend Fund and the Value Line(R)
Equity Allocation Fund are subject to the following fundamental policy:
each such Fund may not, as to 75% of its total assets, purchase the
securities of any issuer (except securities of other investment companies
or securities issued or guaranteed by the United States government or any
agency or instrumentality thereof) if, as a result, (i) more than 5% of
the Fund's total assets would be invested in securities of that issuer; or
(ii) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
For purposes of applying restriction (1) above, under the 1940 Act as
currently in effect, a Fund is not permitted to issue senior securities, except
that a Fund may borrow from any bank if immediately after such borrowing the
value of such Fund's total assets is at least 300% of the principal amount of
all of the Fund's borrowings (i.e., the principal amount of the borrowings may
not exceed 33 1/3% of the Fund's total assets). In the event that such asset
coverage shall at any time fall below 300%, the applicable Fund shall, within
three days thereafter (not including Sundays and holidays), reduce the amount of
its borrowings to an extent that the asset coverage of such borrowings shall be
at least 300%.
The fundamental investment limitations set forth above limit a Fund's
ability to engage in certain investment practices and purchase securities or
other instruments to the extent permitted by, or consistent with, applicable
law. As such, these limitations will change as the statute, rules, regulations
or orders (or, if applicable, interpretations) change, and no shareholder vote
will be required or sought.
Except for restriction (2), if a percentage restriction is adhered to at
the time of investment, a later increase in percentage resulting from a change
in market value of the investment or the total assets will not constitute a
violation of that restriction. With respect to restriction (2), if the
limitations are exceeded as a result of a change in market value then the Fund
will reduce the amount of borrowings within three days thereafter to the extent
necessary to comply with the limitations (not including Sundays and holidays).
The foregoing fundamental policies of each Fund may not be changed without
the affirmative vote of the majority of the outstanding voting securities of the
respective Fund. The 1940 Act defines a majority vote as the vote of the lesser
of (i) 67% or more of the voting securities represented at a meeting at which
more than 50% of the outstanding securities are represented; or (ii) more than
50% of the outstanding voting securities. With respect to the submission of a
change in an investment policy to the holders of outstanding voting securities
of a Fund, such matter shall be deemed to have been effectively acted upon with
respect to a Fund if a majority of the outstanding voting securities of a Fund
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vote for the approval of such matter, notwithstanding that such matter has not
been approved by the holders of a majority of the outstanding voting securities
of any other series of the Trust affected by such matter.
In addition to the foregoing fundamental policies, the Funds are also
subject to strategies and policies discussed herein which, unless otherwise
noted, are non-fundamental policies and may be changed by the Board of Trustees.
INVESTMENT STRATEGIES
Under normal circumstances, each Fund will invest at least 90% of its net
assets (plus any borrowings for investment purposes) in common stocks and
depositary receipts that may include American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") or
other depositary receipts (collectively "Depositary Receipts") that comprise
such Fund's corresponding equity index as set forth below (each, an "Index" and
collectively, the "Indices"). Fund shareholders are entitled to 60 days' notice
prior to any change in this non-fundamental investment policy.
[Download Table]
FUND INDEX
Capital Strength ETF The Capital Strength Index(SM) (1)
Tail Hedge Fund CBOE(R) VIX(R) Tail Hedge Index
Internet Fund Dow Jones Internet Composite Index(SM)
MicroCap Fund Dow Jones Select MicroCap Index(SM)
ISE Chindia Fund ISE Chindia Index(TM)
ISE Gas Fund ISE-REVERE Natural Gas Index(TM)
ISE Water Fund ISE Water Index(TM)
Dividend Leaders Fund Morningstar(R) Dividend Leaders(SM) Index
Equal Weighted Fund NASDAQ-100 Equal Weighted Index(SM)
Ex-Technology Fund NASDAQ-100 Ex-Tech Sector Index(SM)
Technology Fund NASDAQ-100 Technology Sector Index(SM)
Community Bank Fund NASDAQ OMX(R) ABA Community Bank Index(SM)
Clean Edge(R) Fund NASDAQ(R) Clean Edge(R) Green Energy Index(SM)
Biotech Fund NYSE Arca Biotechnology Index(SM)
S&P REIT Fund S&P United States REIT Index(2)
US IPO Fund IPOX(R)-100 U.S. Index
Value Line(R) 100 Fund Value Line(R) 100 Index(TM)
Value Line(R) Dividend Fund Value Line(R) Dividend Index(TM)
Value Line(R) Equity Allocation Fund Value Line(R) Equity Allocation Index(TM)
---------------------------------------
(1) On June 18, 2010, the Fund's Index changed from the Deutsche Bank CROCI(R)
US + Index(TM) to the Credit Suisse U.S. Value Index, Powered by HOLT(TM).
On June 4, 2013, the Fund's Index changed from the Credit Suisse U.S.
Value Index, Powered by HOLT(TM) to The Capital Strength Index(SM).
(2) Prior to November 6, 2008, the S&P REIT Fund's Index was the S&P REIT
Composite Index.
TYPES OF INVESTMENTS
Call Options. A call option is a contractual obligation which gives the
buyer of the option the right to purchase a certain number of shares of common
stock from the writer (seller) of the option at a predetermined price. If the
predetermined price is reached, the buyer has the right, depending on the type
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of option, to exercise the option at the option's expiration date or at any time
up until the option's expiration.
Delayed-Delivery Transactions. The Funds may from time to time purchase
securities on a "when-issued" or other delayed-delivery basis. The price of
securities purchased in such transactions is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. During the period between the purchase and settlement, a Fund does
not remit payment to the issuer, no interest is accrued on debt securities and
dividend income is not earned on equity securities. Delayed-delivery commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of a decline
in value of a Fund's other assets. While securities purchased in
delayed-delivery transactions may be sold prior to the settlement date, the
Funds intend to purchase such securities with the purpose of actually acquiring
them. At the time a Fund makes the commitment to purchase a security in a
delayed-delivery transaction, it will record the transaction and reflect the
value of the security in determining its net asset value.
The Funds will earmark or maintain in a segregated account cash, U.S.
government securities, and high-grade liquid debt securities equal in value to
commitments for delayed-delivery securities. Such earmarked or segregated
securities will mature or, if necessary, be sold on or before the settlement
date. When the time comes to pay for delayed-delivery securities, a Fund will
meet its obligations from then-available cash flow, sale of the securities
earmarked or held in the segregated account described above, sale of other
securities, or, although it would not normally expect to do so, from the sale of
the delayed-delivery securities themselves (which may have a market value
greater or less than a Fund's payment obligation).
Although the Prospectus and this SAI describe certain permitted methods of
segregating assets or otherwise "covering" certain transactions, such
descriptions are not all-inclusive. Each Fund may segregate against or cover
such transactions using other methods permitted under the 1940 Act, the rules
and regulations thereunder, or orders issued by the SEC thereunder. For these
purposes, interpretations and guidance provided by the SEC staff may be taken
into account when deemed appropriate by a Fund.
Fixed Income Investments and Cash Equivalents. Normally, the Funds invest
substantially all of their assets to meet their investment objectives; however,
for temporary defensive purposes, the Funds may invest in fixed income
investments and cash equivalents in order to provide income, liquidity and
preserve capital.
Fixed income investments and cash equivalents held by each Fund may
include, without limitation, the types of investments set forth below.
(1) A Fund may invest in U.S. government securities, including
bills, notes and bonds differing as to maturity and rates of interest,
which are either issued or guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities. U.S. government securities
include securities that are issued or guaranteed by the United States
Treasury, by various agencies of the U.S. government, or by various
instrumentalities that have been established or sponsored by the U.S.
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government. U.S. Treasury securities are backed by the "full faith and
credit" of the United States. Securities issued or guaranteed by federal
agencies and U.S. government-sponsored instrumentalities may or may not be
backed by the full faith and credit of the United States. Some of the U.S.
government agencies that issue or guarantee securities include the
Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration and The Tennessee Valley Authority. An instrumentality of
the U.S. government is a government agency organized under Federal charter
with government supervision. Instrumentalities issuing or guaranteeing
securities include, among others, Federal Home Loan Banks, the Federal
Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and FNMA. In the case of those U.S. government securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
security for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event that the agency or
instrumentality does not meet its commitment. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their
securities, and consequently, the value of such securities may fluctuate.
(2) A Fund may invest in certificates of deposit issued against
funds deposited in a bank or savings and loan association. Such
certificates are for a definite period of time, earn a specified rate of
return, and are normally negotiable. If such certificates of deposit are
non-negotiable, they will be considered illiquid securities and be subject
to a Fund's 15% restriction on investments in illiquid securities.
Pursuant to the certificate of deposit, the issuer agrees to pay the
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Under current FDIC regulations, the maximum
insurance payable as to any one certificate of deposit is $250,000;
therefore, certificates of deposit purchased by the Fund may not be fully
insured. A Fund may only invest in certificates of deposit issued by U.S.
banks with at least $1 billion in assets.
(3) A Fund may invest in bankers' acceptances, which are short-term
credit instruments used to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer
to obtain a stated amount of funds to pay for specific merchandise. The
draft is then "accepted" by a bank that, in effect, unconditionally
guarantees to pay the face value of the instrument on its maturity date.
The acceptance may then be held by the accepting bank as an asset or it
may be sold in the secondary market at the going rate of interest for a
specific maturity.
(4) A Fund may invest in repurchase agreements, which involve
purchases of debt securities with counterparties that are deemed by First
Trust to present acceptable credit risks. In such an action, at the time a
Fund purchases the security, it simultaneously agrees to resell and
redeliver the security to the seller, who also simultaneously agrees to
buy back the security at a fixed price and time. This assures a
predetermined yield for a Fund during its holding period since the resale
price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for a Fund to
invest temporarily available cash. A Fund may enter into repurchase
-8-
agreements only with respect to obligations of the U.S. government, its
agencies or instrumentalities; certificates of deposit; or bankers'
acceptances in which a Fund may invest. Repurchase agreements may be
considered loans to the seller, collateralized by the underlying
securities. The risk to a Fund is limited to the ability of the seller to
pay the agreed-upon sum on the repurchase date; in the event of default,
the repurchase agreement provides that the affected Fund is entitled to
sell the underlying collateral. If the value of the collateral declines
after the agreement is entered into, however, and if the seller defaults
under a repurchase agreement when the value of the underlying collateral
is less than the repurchase price, a Fund could incur a loss of both
principal and interest. The portfolio managers monitor the value of the
collateral at the time the action is entered into and at all times during
the term of the repurchase agreement. The portfolio managers do so in an
effort to determine that the value of the collateral always equals or
exceeds the agreed-upon repurchase price to be paid to a Fund. If the
seller were to be subject to a federal bankruptcy proceeding, the ability
of a Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
(5) A Fund may invest in bank time deposits, which are monies kept
on deposit with banks or savings and loan associations for a stated period
of time at a fixed rate of interest. There may be penalties for the early
withdrawal of such time deposits, in which case the yields of these
investments will be reduced.
(6) A Fund may invest in commercial paper, which are short-term
unsecured promissory notes, including variable rate master demand notes
issued by corporations to finance their current operations. Master demand
notes are direct lending arrangements between the Fund and a corporation.
There is no secondary market for the notes. However, they are redeemable
by a Fund at any time. A Fund's portfolio managers will consider the
financial condition of the corporation (e.g., earning power, cash flow and
other liquidity ratios) and will continuously monitor the corporation's
ability to meet all of its financial obligations, because a Fund's
liquidity might be impaired if the corporation were unable to pay
principal and interest on demand. A Fund may invest in commercial paper
only if its has received the highest rating from at least one nationally
recognized statistical rating organization or, if unrated, judged by First
Trust to be of comparable quality.
(7) A Fund may invest in shares of money market funds, as consistent
with its investment objective and policies. Shares of money market funds
are subject to management fees and other expenses of those funds.
Therefore, investments in money market funds will cause the Fund to bear
proportionately the costs incurred by the money market funds' operations.
At the same time, a Fund will continue to pay its own management fees and
expenses with respect to all of its assets, including any portion invested
in the shares of other investment companies. Although money market funds
that operate in accordance with Rule 2a-7 under the 1940 Act seek to
preserve a $1.00 share price, it is possible for the Fund to lose money by
investing in money market funds.
Illiquid Securities. The Funds may invest in illiquid securities (i.e.,
securities that are not readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to, certain restricted
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securities (securities the disposition of which is restricted under the federal
securities laws), securities that may only be resold pursuant to Rule 144A under
the 1933 Act that are deemed to be illiquid; and repurchase agreements with
maturities in excess of seven days. However, a Fund will not acquire illiquid
securities if, as a result, such securities would comprise more than 15% of the
value of a Fund's net assets. The Board of Trustees or its delegate has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are liquid or illiquid for purposes of this
15% limitation. The Board of Trustees has delegated to First Trust the
day-to-day determination of the illiquidity of any equity or fixed-income
security, although it has retained oversight for such determinations. With
respect to Rule 144A securities, First Trust considers factors such as (i) the
nature of the market for a security (including the institutional private resale
market, the frequency of trades and quotes for the security, the number of
dealers willing to purchase or sell the security, the amount of time normally
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand instruments), and (iii) other
permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the 1933 Act. Where registration is required, a
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time a Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than that which prevailed when it
decided to sell. Illiquid securities will be priced at fair value as determined
in good faith under procedures adopted by the Board of Trustees. If, through the
appreciation of illiquid securities or the depreciation of liquid securities, a
Fund should be in a position where more than 15% of the value of its net assets
are invested in illiquid securities, including restricted securities which are
not readily marketable, a Fund will take such steps as is deemed advisable, if
any, to protect liquidity.
Money Market Funds. The Funds may invest in shares of money market funds
to the extent permitted by the 1940 Act.
Warrants. The Funds may invest in warrants. Warrants acquired by a Fund
entitle it to buy common stock from the issuer at a specified price and time.
They do not represent ownership of the securities but only the right to buy
them. Warrants are subject to the same market risks as stocks, but may be more
volatile in price. A Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration date.
PORTFOLIO TURNOVER
The Funds buy and sell portfolio securities in the normal course of their
investment activities. The proportion of a Fund's investment portfolio that is
bought and sold during a year is known as a Fund's portfolio turnover rate. A
turnover rate of 100% would occur, for example, if a Fund bought and sold
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securities valued at 100% of its net assets within one year. A high portfolio
turnover rate could result in the payment by a Fund of increased brokerage
costs, expenses and taxes. The portfolio turnover rates for the Funds for the
fiscal years ended December 31, 2012 and December 31, 2013 for the Funds are set
forth in the table below. The Capital Strength ETF experienced a significant
increase in portfolio turnover in the fiscal year ended December 31, 2013 as
compared to the portfolio turnover in the fiscal year ended December 31, 2012
because, as a result of the change to the Fund's Index, the Fund's holdings had
to be modified accordingly. In-kind transactions are not taken into account in
calculating the portfolio turnover rate.
PORTFOLIO TURNOVER RATE
FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND DECEMBER 31, 2012 DECEMBER 31, 2013
Capital Strength ETF 84% 156%
Tail Hedge Fund 2% 4%
Internet Fund 33% 17%
MicroCap Fund 71% 70%
ISE Chindia Fund 29% 40%
ISE Gas Fund 41% 49%
ISE Water Fund 31% 45%
Dividend Leaders Fund 31% 35%
Equal Weighted Fund 34% 38%
Ex-Technology Fund 40% 33%
Technology Fund 26% 33%
Community Bank Fund 17% 29%
Clean Edge(R) Fund 24% 49%
Biotech Fund 39% 48%
S&P REIT Fund 8% 11%
US IPO Fund 48% 30%
Value Line(R) 100 Fund 304% 350%
Value Line(R) Dividend Fund 54% 71%
Value Line(R) Equity Allocation Fund 203% 186%
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, as a non-principal investment
strategy, First Trust is authorized to select certain Funds, with notice to the
Board of Trustees, to lend portfolio securities representing up to 33 1/3% of
the value of their total assets to broker-dealers, banks or other institutional
borrowers of securities. As with other extensions of credit, there may be risks
of delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the Funds will
only enter into domestic loan arrangements with broker-dealers, banks or other
institutions that First Trust has determined are creditworthy under guidelines
established by the Board of Trustees. The Funds will pay a portion of the income
earned on the lending transaction to the placing broker and may pay
-11-
administrative and custodial fees in connection with these loans. First Trust
may select any Fund to participate in the securities lending program, at its
discretion with notice to the Board of Trustees.
In these loan arrangements, the Funds will receive collateral in the form
of cash, U.S. government securities or other high grade debt obligations equal
to at least 102% (for domestic securities) or 105% (for international
securities) of the market value of the securities loaned as determined at the
time of loan origination. This collateral must be valued daily by First Trust or
the applicable Fund's lending agent and, if the market value of the loaned
securities increases, the borrower must furnish additional collateral to the
Fund. During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on the securities. Loans are subject to
termination at any time by the Fund or the borrower. While a Fund does not have
the right to vote securities on loan, it would terminate the loan and regain the
right to vote if that were considered important with respect to the investment.
When a Fund lends portfolio securities to a borrower, payments in lieu of
dividends made by the borrower to the Fund will not constitute "qualified
dividends" taxable at the same rate as long-term capital gains, even if the
actual dividends would have constituted qualified dividends had the Fund held
the securities.
HEDGING STRATEGIES
General Description of Hedging Strategies
The Funds may engage in hedging activities. First Trust may cause the
Funds to utilize a variety of financial instruments, including options, forward
contracts, futures contracts (hereinafter referred to as "Futures" or "Futures
Contracts"), and options on Futures Contracts to attempt to hedge each Fund's
holdings. The use of Futures is not a part of a principal investment strategy of
the Funds.
Hedging or derivative instruments on securities generally are used to
hedge against price movements in one or more particular securities positions
that a Fund owns or intends to acquire. Such instruments may also be used to
"lock-in" realized but unrecognized gains in the value of portfolio securities.
Hedging instruments on stock indices, in contrast, generally are used to hedge
against price movements in broad equity market sectors in which a Fund has
invested or expects to invest. Hedging strategies, if successful, can reduce the
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. The use of
hedging instruments is subject to applicable regulations of the SEC, the several
options and Futures exchanges upon which they are traded, the Commodity Futures
Trading Commission (the "CFTC") and various state regulatory authorities. In
addition, a Fund's ability to use hedging instruments may be limited by tax
considerations.
General Limitations on Futures and Options Transactions
Each Fund limits its direct investments in Futures, options on Futures and
swaps to the extent necessary for the Advisor to claim the exclusion from
regulation as a "commodity pool operator" with respect to each Fund under CFTC
-12-
Rule 4.5, as such rule may be amended from time to time. Under Rule 4.5 as
currently in effect, each Fund limits its trading activity in Futures, option on
Futures and swaps (excluding activity for "bona fide hedging purposes," as
defined by the CFTC) such that it meets one of the following tests: (i)
aggregate initial margin and premiums required to establish its Futures, options
on Futures and swap positions do not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
such positions; or (ii) aggregate net notional value of its Futures, options on
Futures and swap positions does not exceed 100% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
such positions.
The Advisor has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with respect to each Fund with
the National Futures Association, the Futures industry's self-regulatory
organization. The Funds will not enter into Futures Contracts and options
transactions if more than 30% of their net assets would be committed to such
instruments.
If a Fund were no longer able to claim the exclusion, the Advisor would be
required to register as a "commodity pool operator," and the Fund and the
Advisor would be subject to regulation under the Commodity Exchange Act (the
"CEA").
The foregoing limitations are non-fundamental policies of the Funds and
may be changed without shareholder approval as regulatory agencies permit.
Asset Coverage for Futures and Options Positions
The Funds will comply with the regulatory requirements of the SEC and the
CFTC with respect to coverage of options and Futures positions by registered
investment companies and, if the guidelines so require, will earmark or set
aside cash, U.S. government securities, high grade liquid debt securities and/or
other liquid assets permitted by the SEC and CFTC in a segregated custodial
account in the amount prescribed. Securities earmarked or held in a segregated
account cannot be sold while the Futures or options position is outstanding,
unless replaced with other permissible assets, and will be marked-to-market
daily.
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Stock Options
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 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. Additionally,
the value of an option does not increase or decrease at the same rate as the
underlying stock (although they generally move in the same direction). If the
value of the underlying stock exceeds the strike price of an option, it is
likely that the holder of that option will exercise their right to purchase the
stock, which may limit a Fund's ability to take advantage of the rising value of
the underlying stock.
Stock Index Options
The Funds may purchase stock index options, sell stock index options in
order to close out existing positions, and/or write covered options on stock
indices for hedging purposes. Stock index options are put options and call
options on various stock indices. In most respects, they are identical to listed
options on common stocks. The primary difference between stock options and index
options occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the exercise
of an index option, settlement does not occur by delivery of the securities
comprising the stock index. The option holder who exercises the index option
receives an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the stock index and the exercise
price of the option expressed in dollars times a specified multiple.
A stock index fluctuates with changes in the market values of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the S&P 500 Index or the Value Line(R) Composite
Index or a more narrow market index, such as the S&P 100 Index. Indices may also
be based on an industry or market segment. Options on stock indices are
currently traded on the following exchanges: the Chicago Board Options Exchange,
NYSE Amex Options, NASDAQ(R) and the Philadelphia Stock Exchange.
The Funds' use of stock index options is subject to certain risks.
Successful use by a Fund of options on stock indices will be subject to the
ability of First Trust to correctly predict movements in the directions of the
stock market. This requires different skills and techniques than predicting
changes in the prices of individual securities. In addition, a Fund's ability to
effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline through transactions in put options
on stock indices, depends on the degree to which price movements in the
underlying index correlate with the price movements of the securities held by
the Fund. Inasmuch as the Funds' securities will not duplicate the components of
an index, the correlation will not be perfect. Consequently, a Fund will bear
the risk that the prices of its securities being hedged will not move in the
same amount as the prices of its put options on the stock indices. It is also
possible that there may be a negative correlation between the index and a Fund's
securities, which would result in a loss on both such securities and the options
on stock indices acquired by the Fund.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The purchase of stock index
options involves the risk that the premium and transaction costs paid by a Fund
in purchasing an option will be lost as a result of unanticipated movements in
prices of the securities comprising the stock index on which the option is
based.
-14-
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If a
Fund is unable to close out a call option on securities that it has written
before the option is exercised, a Fund may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such
securities. If a Fund is unable to effect a closing sale transaction with
respect to options on securities that it has purchased, it would have to
exercise the option in order to realize any profit and would incur transaction
costs upon the purchase and sale of the underlying securities.
The writing and purchasing of options is a highly specialized activity,
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging. Options transactions may result in significantly higher
transaction costs and portfolio turnover for the Funds.
Futures Contracts
The Funds may enter into Futures Contracts, including index Futures as a
hedge against movements in the equity markets, in order to hedge against changes
on securities held or intended to be acquired by a Fund or for other purposes
permissible under the CEA. A Fund's hedging may include sales of Futures as an
offset against the effect of expected declines in stock prices and purchases of
Futures as an offset against the effect of expected increases in stock prices.
The Funds will not enter into Futures Contracts, which are prohibited under the
CEA and will, to the extent required by regulatory authorities, enter only into
Futures Contracts that are traded on national Futures exchanges and are
standardized as to maturity date and underlying financial instrument. The
principal interest rate Futures exchanges in the United States are the Chicago
Board of Trade and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the CEA by the CFTC.
An interest rate Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., a debt security) or currency for a specified price
at a designated date, time and place. An index Futures Contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index Futures
Contract was originally written. Transaction costs are incurred when a Futures
Contract is bought or sold and margin deposits must be maintained. A Futures
Contract may be satisfied by delivery or purchase, as the case may be, of the
instrument or by payment of the change in the cash value of the index. More
commonly, Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase price
is less than the original sale price, a gain will be realized. Conversely, if
the offsetting sale price is more than the original purchase price, a gain will
be realized; if it is less, a loss will be realized. The transaction costs must
-15-
also be included in these calculations. There can be no assurance, however, that
a Fund will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, a Fund will continue to be required to maintain
the margin deposits on the Futures Contract.
Margin is the amount of funds that must be deposited by a Fund with its
custodian in a segregated account in the name of the Futures commission merchant
in order to initiate Futures trading and to maintain a Fund's open positions in
Futures Contracts. A margin deposit is intended to ensure a Fund's performance
of the Futures Contract.
The margin required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded and may be significantly
modified from time to time by the exchange during the term of the Futures
Contract. Futures Contracts are customarily purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
Futures Contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to a Fund. In computing daily net asset value, a Fund
will mark to market the current value of its open Futures Contracts. The Funds
expect to earn interest income on their margin deposits.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, a Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The day limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
-16-
thereby preventing prompt liquidation of Futures positions and subjecting some
investors to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a Futures position. A Fund would continue to be required
to meet margin requirements until the position is closed, possibly resulting in
a decline in the Fund's net asset value. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
A public market exists in Futures Contracts covering a number of indices,
including but not limited to, the S&P 500 Index, the S&P 100 Index, the
NASDAQ-100 Index(R), the Value Line(R) Composite Index and the NYSE Composite
Index(R).
Options on Futures
The Funds may also purchase or write put and call options on Futures
Contracts and enter into closing transactions with respect to such options to
terminate an existing position. A Futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a Futures Contract at a specified exercise price prior to the
expiration of the option. Upon exercise of a call option, the holder acquires a
long position in the Futures Contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. Prior to
exercise or expiration, a Futures option may be closed out by an offsetting
purchase or sale of a Futures option of the same series.
The Funds may use options on Futures Contracts in connection with hedging
strategies. Generally, these strategies would be applied under the same market
and market sector conditions in which the Funds use put and call options on
securities or indices. The purchase of put options on Futures Contracts is
analogous to the purchase of puts on securities or indices so as to hedge a
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a Futures Contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the Futures Contract. If the price at expiration of
a written call option is below the exercise price, a Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in a Fund's holdings of securities. If the price when the
option is exercised is above the exercise price, however, a Fund will incur a
loss, which may be offset, in whole or in part, by the increase in the value of
the securities held by a Fund that were being hedged. Writing a put option or
purchasing a call option on a Futures Contract serves as a partial hedge against
an increase in the value of the securities a Fund intends to acquire.
As with investments in Futures Contracts, the Funds are required to
deposit and maintain margin with respect to put and call options on Futures
Contracts written by them. Such margin deposits will vary depending on the
nature of the underlying Futures Contract (and the related initial margin
requirements), the current market value of the option, and other Futures
positions held by a Fund. A Fund will earmark or set aside in a segregated
-17-
account at such Fund's custodian, liquid assets, such as cash, U.S. government
securities or other high-grade liquid debt obligations equal in value to the
amount due on the underlying obligation. Such segregated assets will be
marked-to-market daily, and additional assets will be earmarked or placed in the
segregated account whenever the total value of the earmarked or segregated
assets falls below the amount due on the underlying obligation.
The risks associated with the use of options on Futures Contracts include
the risk that the Funds may close out its position as a writer of an option only
if a liquid secondary market exists for such options, which cannot be assured. A
Fund's successful use of options on Futures Contracts depends on First Trust's
ability to correctly predict the movement in prices of Futures Contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the Futures
Contract subject to the option. For additional information, see "Futures
Contracts." Certain characteristics of the Futures market might increase the
risk that movements in the prices of Futures Contracts or options on Futures
Contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the Futures and
options on Futures Contracts markets are subject to daily variation margin calls
and might be compelled to liquidate Futures or options on Futures Contracts
positions whose prices are moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price volatility of the instruments
and distort the normal price relationship between the Futures or options and the
investments being hedged. Also, because of initial margin deposit requirements,
there might be increased participation by speculators in the Futures markets.
This participation also might cause temporary price distortions. In addition,
activities of large traders in both the Futures and securities markets involving
arbitrage, "program trading," and other investment strategies might result in
temporary price distortions.
SUBLICENSE AGREEMENTS
The Trust on behalf of each Fund relies on a product license agreement
(each, a "Product License Agreement") by and between the provider of each Index
(each, an "Index Provider") and First Trust and a related sublicense agreement
(the "Sublicense Agreement") with First Trust that grants the Trust, on behalf
of each Fund, a non-exclusive and non-transferable sublicense to use certain
intellectual property of such Index Provider as set forth below, in connection
with the issuance, distribution, marketing and/or promotion of each Fund.
Pursuant to each Sublicense Agreement, each Fund has agreed to be bound by
certain provisions of each Product License Agreement. Pursuant to each Product
License Agreement, First Trust will pay each Index Provider an annual license
fee. Each Fund will reimburse First Trust for its costs associated with the
respective Product License Agreement; except with respect to the Capital
Strength ETF, which will not be obligated to reimburse First Trust in an annual
amount of more than 0.10% of the assets of the Fund.
-18-
[Enlarge/Download Table]
FUND INDEX INDEX PROVIDER
Capital Strength ETF(1) The Capital Strength Index(SM) The NASDAQ OMX Group, Inc.
Tail Hedge Fund CBOE(R) VIX(R) Tail Hedge Index Chicago Board Options Exchange, Incorporated
Internet Fund Dow Jones Internet Composite Index(SM) S&P Dow Jones Indices, LLC
MicroCap Fund Dow Jones Select MicroCap Index(SM) S&P Dow Jones Indices, LLC
ISE Chindia Fund ISE Chindia Index(TM) International Securities Exchange, LLC
ISE Gas Fund ISE-REVERE Natural Gas Index(SM) International Securities Exchange, LLC
ISE Water Fund ISE Water Index(TM) International Securities Exchange, LLC
Dividend Leaders Fund Morningstar(R) Dividend Leaders(SM) Morningstar, Inc.
Index
Equal Weighted Fund NASDAQ-100 Equal Weighted Index(SM) The NASDAQ OMX Group, Inc.
Ex-Technology Fund NASDAQ-100 Ex-Tech Sector Index(SM) The NASDAQ OMX Group, Inc.
Technology Fund NASDAQ-100 Technology Sector Index(SM) The NASDAQ OMX Group, Inc.
Community Bank Fund NASDAQ OMX(R) ABA Community Bank The NASDAQ OMX Group, Inc.
Index(SM)
Clean Edge(R) Fund NASDAQ(R) Clean Edge(R) Green Energy The NASDAQ OMX Group, Inc.
Index(SM)
Biotech Fund NYSE Arca Biotechnology Index(SM) NYSE Euronext
S&P REIT Fund S&P United States REIT Index S&P Dow Jones Indices, LLC
US IPO Fund IPOX(R)-100 U.S. Index IPOX(R) Schuster LLC
Value Line(R) 100 Fund Value Line(R) 100 Index(TM) Value Line(R) Publishing, Inc.
Value Line(R) Dividend Fund Value Line(R) Dividend Index(TM) Value Line(R) Publishing, Inc.
Value Line(R) Equity Allocation Value Line(R) Equity Allocation Value Line(R) Publishing, Inc.
Fund Index(TM)
--------------------
(1) On June 18, 2010, the Fund's Index changed from the Deutsche Bank CROCI(R)
US + Index(TM) to the Credit Suisse U.S. Value Index, Powered by HOLT(TM).
On June 4, 2013, the Fund's Index changed from the Credit Suisse U.S.
Value Index, Powered by HOLT(TM) to The Capital Strength Index(SM).
-19-
Capital Strength ETF Disclaimer
The Fund is not sponsored, endorsed, sold or promoted by The NASDAQ OMX
Group, Inc. ("NASDAQ OMX") or its affiliates (NASDAQ OMX with its affiliates are
referred to as the "Corporations"). The Corporations have not passed on the
legality or suitability of, or the accuracy or adequacy of descriptions and
disclosures relating to, the Fund. The Corporations make no representation or
warranty, express or implied, to the owners of the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly, or the ability of The Capital Strength Index(SM) to track
general stock market performance. The Corporations' only relationship to First
Trust with respect to the Fund is in the licensing of The Capital Strength
Index(SM), and certain trade names of the Corporations and the use of The
Capital Strength Index(SM), which are determined, composed and calculated by
NASDAQ OMX without regard to First Trust or the Fund. NASDAQ OMX has no
obligation to take the needs of First Trust or the owners of the Fund into
consideration in determining, composing or calculating The Capital Strength
Index(SM). The Corporations are not responsible for and have not participated in
the determination of the timing of, prices at, or quantities of Fund Shares to
be issued or in the determination or calculation of the equation by which Fund
Shares are to be converted into cash. The Corporations have no liability in
connection with the administration, marketing or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED
CALCULATION OF THE CAPITAL STRENGTH INDEX(SM) OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED
BY LICENSEE, OWNERS OF THE PRODUCT(S) OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE CAPITAL STRENGTH INDEX(SM) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS
MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
CAPITAL STRENGTH INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL
DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Tail Hedge Fund
S&P(R) and S&P 500(R) are registered trademarks of Standard & Poor's
Financial Services LLC ("SPFS"); and CBOE(R), Chicago Board Options Exchange(R),
CBOE Volatility Index(R) and VIX(R) are registered trademarks of Chicago Board
Options Exchange, Incorporated ("CBOE(R)"); and these trademarks have been
licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain
purposes by First Trust.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P DOW JONES
INDICES LLC, SPFS, THEIR RESPECTIVE AFFILIATES (COLLECTIVELY, "S&P") OR BY
CHICAGO BOARD OPTIONS EXCHANGE AND ITS AFFILIATES ("CBOE(R)"). S&P AND CBOE(R)
-20-
MAKE NO REPRESENTATION, CONDITION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS
OF THE FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING
IN SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE
CBOE(R) VIX(R) TAIL HEDGE (THE "INDEX") TO TRACK THE PERFORMANCE OF CERTAIN
FINANCIAL MARKETS AND/OR SECTIONS THEREOF AND/OR OF GROUPS OF ASSETS OR ASSET
CLASSES. S&P'S ONLY RELATIONSHIP TO FIRST TRUST ADVISORS L.P. ("LICENSEE") IS IN
THE LICENSING OF THE CERTAIN TRADEMARKS AND TRADE NAMES AND THE INDEX, WHICH IS
DETERMINED, COMPOSED AND CALCULATED BY CBOE(R) WITHOUT REGARD TO THE LICENSEE OR
THE FUND. S&P AND CBOE(R) HAVE NO OBLIGATION TO TAKE THE NEEDS OF FIRST TRUST OR
THE OWNERS OF THE FUND INTO CONSIDERATION IN DETERMINING, COMPOSING OR
CALCULATING THE INDEX. S&P AND CBOE(R) ARE NOT RESPONSIBLE FOR AND HAVE NOT
PARTICIPATED IN THE DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE
TIMING OF THE ISSUANCE OR SALE OF THE FUND OR IN THE DETERMINATION OR
CALCULATION OF THE EQUATION BY WHICH THE FUND SHARES ARE TO BE CONVERTED INTO
CASH. S&P AND CBOE(R) HAVE NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE
ADMINISTRATION, MARKETING OR TRADING OF THE FUND. THERE IS NO ASSURANCE THAT
INVESTMENT PRODUCTS BASED ON THE INDEX WILL ACCURATELY TRACK INDEX PERFORMANCE
OR PROVIDE POSITIVE INVESTMENT RETURNS. S&P DOW JONES INDICES LLC IS NOT AN
INVESTMENT ADVISOR. INCLUSION OF A SECURITY WITHIN AN INDEX IS NOT A
RECOMMENDATION BY S&P OR CBOE(R) TO BUY, SELL OR HOLD SUCH SECURITY, NOR IS IT
CONSIDERED TO BE INVESTMENT ADVICE.
S&P AND CBOE(R) DO NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR
THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN OR ANY COMMUNICATION,
INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING
ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P AND CBOE(R) SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, DELAYS OR INTERRUPTIONS THEREIN. S&P AND
CBOE(R) MAKE NO WARRANTY, CONDITION OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. S&P AND CBOE(R)
MAKE NO EXPRESS OR IMPLIED WARRANTIES, REPRESENTATIONS OR CONDITIONS, AND
EXPRESSLY DISCLAIM ALL WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE AND ANY OTHER EXPRESS OR IMPLIED WARRANTY OR
CONDITION WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P OR CBOE(R) HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) RESULTING FROM THE USE OF THE INDEX OR ANY DATA
-21-
INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER
IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE. THERE ARE NO THIRD PARTY
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P AND FIRST TRUST,
OTHER THAN THE LICENSORS OF S&P.
Internet Fund and MicroCap Fund Disclaimer
The "Dow Jones Internet Composite Index(SM)" and "Dow Jones Select
MicroCap Index(SM)" are products of S&P Dow Jones Indices LLC ("SPDJI"), and
have been licensed for use by First Trust. Dow Jones(R), Dow Jones Internet
Composite Index(SM) and Dow Jones Select MicroCap Index(SM) are trademarks of
Dow Jones Trademark Holdings LLC ("Dow Jones"). The foregoing marks have been
licensed to SPDJI and have been sublicensed for use for certain purposes by
First Trust on behalf of the Funds. The First Trust Dow Jones Internet Index
Fund and First Trust Dow Jones Select MicroCap Index Fund are not sponsored,
endorsed, sold or promoted by SPDJI, Dow Jones or their respective affiliates.
SPDJI, Dow Jones and their respective affiliates make no representation or
warranty, express or implied, to the owners of the First Trust Dow Jones
Internet Index Fund and First Trust Dow Jones Select MicroCap Index Fund or any
member of the public regarding the advisability of investing in securities
generally or in the First Trust Dow Jones Internet Index Fund and First Trust
Dow Jones Select MicroCap Index Fund particularly. The only relationship of
SPDJI, Dow Jones or any of their respective affiliates to the Licensee with
respect to the Indexes is the licensing of certain trademarks, trade names and
service marks and of the Dow Jones Internet Composite Index(SM) and Dow Jones
Select MicroCap Index(SM) which are determined, composed and calculated by SPDJI
without regard to First Trust, First Trust Dow Jones Internet Index Fund or
First Trust Dow Jones Select MicroCap Index Fund. SPDJI and Dow Jones have no
obligation to take the needs of First Trust or the owners of the First Trust Dow
Jones Internet Index Fund or First Trust Dow Jones Select MicroCap Index Fund
into consideration in determining, composing or calculating the Dow Jones
Internet Composite Index(SM) and Dow Jones Select MicroCap Index(SM). SPDJI, Dow
Jones and their respective affiliates are not responsible for and have not
participated in the determination of the timing of, prices at, or quantities of
the First Trust Dow Jones Internet Index Fund or First Trust Dow Jones Select
MicroCap Index Fund to be issued or in the determination or calculation of the
equation by which the First Trust Dow Jones Internet Index Fund or First Trust
Dow Jones Select MicroCap Index Fund are to be converted into cash. SPDJI, Dow
Jones and their respective affiliates have no obligation or liability in
connection with the administration, marketing or trading of the First Trust Dow
Jones Internet Index Fund or First Trust Dow Jones Select MicroCap Index Fund.
There is no assurance that investment products based on the Dow Jones Internet
Composite Index(SM) and the Dow Jones Select MicroCap Index(SM) will accurately
track index performance or provide positive investment returns. SPDJI is not an
investment advisor. Inclusion of a security within an index is not a
recommendation by SPDJI to buy, sell or hold such security, nor is it considered
to be investment advice.
SPDJI, DOW JONES AND THEIR RESPECTIVE AFFILIATES DO NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE DOW JONES INTERNET COMPOSITE INDEX(SM)
AND DOW JONES SELECT MICROCAP INDEX(SM) OR ANY DATA INCLUDED THEREIN AND SPDJI,
-22-
DOW JONES AND THEIR RESPECTIVE AFFILIATES SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. SPDJI, DOW JONES AND THEIR
RESPECTIVE AFFILIATES MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY FIRST TRUST, OWNERS OF THE FIRST TRUST DOW JONES INTERNET INDEX FUND
OR FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE DOW JONES INTERNET COMPOSITE INDEX(SM) AND DOW JONES
SELECT MICROCAP INDEX(SM) OR ANY DATA INCLUDED THEREIN. SPDJI, DOW JONES AND
THEIR RESPECTIVE AFFILIATES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE DOW JONES INTERNET COMPOSITE INDEX(SM) AND DOW JONES
SELECT MICROCAP INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL SPDJI, DOW JONES OR THEIR RESPECTIVE AFFILIATES
HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR
CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE. THERE ARE NO
THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN SPDJI AND
FIRST TRUST, OTHER THAN THE LICENSORS OF SPDJI.
ISE Chindia Fund, ISE Gas Fund and ISE Water Fund Disclaimer
The Funds are not sponsored, endorsed, sold or promoted by the Index
Provider. The Index Provider makes no representation or warranty, express or
implied, to the owners of the Funds or any member of the public regarding the
advisability of trading in the Funds. The Index Provider's only relationship to
First Trust is the licensing of certain trademarks and trade names of the Index
Provider and of the Indexes which are determined, composed and calculated by the
Index Provider without regard to First Trust or the Funds. The Index Provider
has no obligation to take the needs of First Trust or the owners of the Funds
into consideration in determining, composing or calculating the Indexes. The
Index Provider is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the Funds to be
listed or in the determination or calculation of the equation by which the Funds
are to be converted into cash. The Index Provider has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
THE INDEX PROVIDER DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF THE INDEXES OR ANY DATA INCLUDED THEREIN AND THE INDEX PROVIDER SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. THE INDEX
PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
FIRST TRUST, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE INDEXES OR ANY DATA INCLUDED THEREIN. THE INDEX PROVIDER MAKES NO EXPRESS OR
-23-
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO INDEXES OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE
INDEX PROVIDER HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE,
SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES, OF ANY
AGREEMENTS OR ARRANGEMENTS BETWEEN THE INDEX PROVIDER AND FIRST TRUST.
Dividend Leaders Fund Disclaimer
MORNINGSTAR, INC. ("MORNINGSTAR"), DOES NOT GUARANTEE THE ACCURACY AND/OR
THE COMPLETENESS OF THE MORNINGSTAR(R) DIVIDEND LEADERS(SM) INDEX OR ANY DATA
INCLUDED THEREIN AND MORNINGSTAR SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS OR INTERRUPTIONS THEREIN. MORNINGSTAR MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST, OWNERS OR USERS OF THE
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE MORNINGSTAR(R) DIVIDEND LEADERS(SM) INDEX OR ANY DATA
INCLUDED THEREIN. MORNINGSTAR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE MORNINGSTAR(R) DIVIDEND
LEADERS(SM) INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL MORNINGSTAR HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Equal Weighted Fund, Ex-Technology Fund and Technology Fund Disclaimer
The Funds are not sponsored, endorsed, sold or promoted by The NASDAQ OMX
Group, Inc. ("NASDAQ OMX") or its affiliates (NASDAQ OMX with its affiliates are
referred to as the "Corporations"). The Corporations have not passed on the
legality or suitability of, or the accuracy or adequacy of descriptions and
disclosures relating to, the Funds. The Corporations make no representation or
warranty, express or implied to the owners of the Funds or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly, or the ability of the NASDAQ-100 Equal Weighted Index(SM),
NASDAQ-100 Technology Sector Index(SM) or NASDAQ-100 Ex-Tech Sector Index(SM) to
track general stock market performance. The Corporations' only relationship to
First Trust with respect to the Fund is in the licensing of the NASDAQ(R),
NASDAQ-100(R), NASDAQ-100 Index(R), NASDAQ-100 Equal Weighted Index(SM),
NASDAQ-100 Technology Sector Index(SM) or NASDAQ-100 Ex-Tech Sector Index(SM)
trademarks, and certain trade names of the Corporations and the use of the
NASDAQ-100 Equal Weighted Index(SM), NASDAQ-100 Technology Sector Index(SM) or
NASDAQ-100 Ex-Tech Sector Index(SM) which is determined, composed and calculated
-24-
by NASDAQ OMX without regard to First Trust or the Funds. NASDAQ OMX has no
obligation to take the needs of First Trust or the owners of the Funds into
consideration in determining, composing or calculating the NASDAQ-100 Equal
Weighted Index(SM), NASDAQ-100 Technology Sector Index(SM) or NASDAQ-100 Ex-Tech
Sector Index(SM). The Corporations are not responsible for and have not
participated in the determination of the timing of, prices at, or quantities of
Fund shares to be issued or in the determination or calculation of the equation
by which Fund shares are to be converted into cash. The Corporations have no
liability in connection with the administration, marketing or trading of the
Funds.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED
CALCULATION OF THE NASDAQ-100 EQUAL WEIGHTED INDEX(SM), THE NASDAQ-100 EX-TECH
SECTOR INDEX(SM) AND THE NASDAQ-100 TECHNOLOGY SECTOR INDEX(SM) OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT(S) OR ANY OTHER PERSON
OR ENTITY FROM THE USE OF THE NASDAQ-100 EQUAL WEIGHTED INDEX(SM), THE
NASDAQ-100 EX-TECH SECTOR INDEX(SM) AND THE NASDAQ-100 TECHNOLOGY SECTOR
INDEX(SM) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100 EQUAL
WEIGHTED INDEX(SM), THE NASDAQ-100 EX-TECH SECTOR INDEX(SM) AND THE NASDAQ-100
TECHNOLOGY SECTOR INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL
DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Community Bank Fund Disclaimer
The Fund is not sponsored, endorsed, sold or promoted by The NASDAQ OMX
Group, Inc. ("NASDAQ OMX"), American Bankers Association ("ABA") or their
affiliates (NASDAQ OMX and ABA, collectively with their affiliates, are referred
to as the "Corporations"). The Corporations have not passed on the legality or
suitability of, or the accuracy or adequacy of descriptions and disclosures
relating to, the Fund. The Corporations make no representation or warranty,
express or implied to the owners of the Fund or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly, or the ability of the NASDAQ OMX(R) ABA Community Bank Index(SM)
to track general stock market performance. The Corporations' only relationship
to First Trust Advisors L.P. ("Licensee") is in the licensing of the NASDAQ(R),
OMX(R), NASDAQ OMX(R), American Bankers Association, ABA, and NASDAQ OMX(R) ABA
Community Bank Index(SM) trademarks, and certain trade names and service marks
of the Corporations and the use of the NASDAQ OMX ABA Community Bank Index(SM)
which is determined and composed by the Corporations without regard to Licensee
or the Fund. The Corporations have no obligation to take the needs of the
Licensee or the owners of the Fund into consideration in determining, composing
-25-
or calculating the NASDAQ OMX ABA Community Bank Index(SM). The Corporations are
not responsible for and have not participated in the determination of the timing
of, prices at, or quantities of the Fund to be issued or in the determination or
calculation of the equation by which the Fund is to be converted into cash. The
Corporations have no liability in connection with the administration, marketing
or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED
CALCULATION OF THE NASDAQ OMX ABA COMMUNITY BANK INDEX(SM) OR ANY DATA INCLUDED
THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE
RESULTS TO BE OBTAINED BY FIRST TRUST OR THE FUND, OWNERS OF THE FUND, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE NASDAQ OMX ABA COMMUNITY BANK
INDEX(SM) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE NASDAQ OMX ABA COMMUNITY BANK INDEX(SM) OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE
CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
All price history data for the NASDAQ OMX(R) ABA Community Bank Index(SM)
prior to its dissemination date, June 8, 2009, is indicative and NASDAQ OMX(R)
makes no guarantee of the accuracy of back-tested data.
Clean Edge(R) Fund Disclaimer
The Fund is not sponsored, endorsed, sold or promoted by NASDAQ(R), Clean
Edge(R) or their affiliates (NASDAQ(R) and Clean Edge(R), collectively with
their affiliates, are referred to herein as the "Corporations"). The
Corporations have not passed on the legality or suitability of, or the accuracy
or adequacy of descriptions and disclosures relating to, the Fund. The
Corporations make no representation or warranty, express or implied to the
owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly, or the ability of
the NASDAQ(R) Clean Edge(R) Green Energy Index(SM) to track general stock market
or sector performance. The Corporations' relationship to First Trust, with
respect to the Fund, consists of: (i) the licensing of certain indexes, trade
names, trademarks, and service marks and other proprietary data; (ii) the
listing and trading of certain exchange-traded funds; and (iii) the calculating
of intra-day portfolio values for the Fund's shares. The Corporations neither
recommend nor endorse any investment in the Index or the Fund based thereon. The
Corporations are not responsible for and have not participated in the
determination of the timing of, prices at, or quantities of the Fund to be
issued or in the determination or calculation of the equation by which the Fund
is to be converted into cash. The Corporations have no liability in connection
-26-
with the administration, marketing or trading of the Fund. Neither the Index nor
the Fund should be construed as investment advice by the Corporations.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED
CALCULATION OF THE NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX(SM) OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX(SM) OR ANY
DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ(R) CLEAN EDGE(R) GREEN
ENERGY INDEX(SM) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST
PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES,
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
NASDAQ(R) and Clean Edge(R) are not affiliates, but jointly own the Index
and have cross-licensed to one another the rights in their respective marks in
connection with the Index.
Biotech Fund Disclaimer
The Index is a trademark of NYSE Euronext or its affiliates and is
licensed for use by First Trust. The Fund is not sponsored or endorsed by NYSE
Euronext. NYSE Euronext makes no representation or warranty, express or implied,
to the owners of the Fund or any member of the public regarding the advisability
of investing in the Fund or the ability of the Fund to track the performance of
the various sectors represented in the stock market. NYSE Euronext has no
obligation to take the needs of the owners of the Fund into consideration in
determining, composing or calculating the Index. NYSE Euronext is not
responsible for and has not participated in any determination or calculation
made with respect to the issuance or redemption of shares of the Fund.
NYSE EURONEXT DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE INDEX OR ANY DATA INCLUDED THEREIN. NYSE EURONEXT MAKES NO WARRANTY, EXPRESS
OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST, OWNERS OF THE FUND OR
ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE.
NYSE EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY
-27-
SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
S&P REIT Fund Disclaimer
The S&P United States REIT Index is a product of S&P Dow Jones Indices LLC
("SPDJI"). Standard & Poor's(R) and S&P(R) are registered trademarks of Standard
& Poor's Financial Services LLC ("SPFS"). The foregoing marks have been licensed
for use by SPDJI and sublicensed by First Trust Advisors L.P. The First Trust
S&P REIT Index Fund is not sponsored, endorsed, sold or promoted by SPDJI or its
affiliates, and SPDJI and its affiliates make no representation, warranty or
condition regarding the advisability of buying, selling or holding shares of the
Fund.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY SPDJI, SPFS
AND/OR ITS AFFILIATES (COLLECTIVELY, "SPDJI"). SPDJI DOES NOT MAKE ANY
REPRESENTATION, CONDITION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE
FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE S&P
UNITED STATES REIT INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. SPDJI'S ONLY
RELATIONSHIP TO FIRST TRUST ADVISORS L.P. ("FTA") IS THE LICENSING OF CERTAIN
TRADEMARKS AND TRADE NAMES AND OF THE S&P UNITED STATES REIT INDEX WHICH IS
DETERMINED, COMPOSED AND CALCULATED BY SPDJI WITHOUT REGARD TO FTA OR THE FUND.
SPDJI HAS NO OBLIGATION TO TAKE THE NEEDS OF FTA OR THE OWNERS OF THE FUND INTO
CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE S&P UNITED STATES
REIT INDEX. SPDJI IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE
OR SALE OF THE FUND OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY
WHICH THE FUND SHARES ARE TO BE CONVERTED INTO CASH. SPDJI HAS NO OBLIGATION OR
LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING, OR TRADING OF THE
FUND. THERE IS NO ASSURANCE THAT INVESTMENT PRODUCTS BASED ON THE S&P UNITED
STATES REIT INDEX WILL ACCURATELY TRACK INDEX PERFORMANCE OR PROVIDE POSITIVE
INVESTMENT RETURNS. S&P DOW JONES INDICES LLC IS NOT AN INVESTMENT ADVISOR.
INCLUSION OF A SECURITY WITHIN AN INDEX IS NOT A RECOMMENDATION BY SPDJI TO BUY,
SELL, OR HOLD SUCH SECURITY, NOR IS IT CONSIDERED TO BE INVESTMENT ADVICE.
SPDJI DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
UNITED STATES REIT INDEX OR ANY DATA INCLUDED THEREIN AND SPDJI SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. SPDJI MAKES NO
WARRANTY, CONDITION OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY FTA, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE
-28-
OF S&P UNITED STATES REIT INDEX OR ANY DATA INCLUDED THEREIN. SPDJI MAKES NO
EXPRESS OR IMPLIED WARRANTIES, REPRESENTATIONS OR CONDITIONS, AND EXPRESSLY
DISCLAIM ALL WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE AND ANY OTHER EXPRESS OR IMPLIED WARRANTY OR CONDITION
WITH RESPECT TO THE S&P UNITED STATES REIT INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL SPDJI HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) RESULTING FROM THE USE OF THE S&P UNITED STATES REIT
INDEX OR ANY DATA INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE. THERE ARE NO
THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN SPDJI AND
FIRST TRUST, OTHER THAN THE LICENSORS OF SPDJI.
US IPO Fund Disclaimer
The Fund is not sponsored, endorsed, sold or promoted by IPOX(R). IPOX(R)
makes no representation or warranty, express or implied, to the owners of the
Fund or any member of the public regarding the advisability of trading in the
Fund. IPOX(R)'s only relationship to First Trust is the licensing of certain
trademarks and trade names of IPOX(R) and of the U.S. IPOX(R) 100 Index, which
is determined, composed and calculated by IPOX(R) without regard to First Trust
or the Fund.
IPOX(R) IS A REGISTERED INTERNATIONAL TRADEMARK OF IPOX(R) SCHUSTER LLC
AND IPOX(R) SCHUSTER, IPOX(R)-100 AND IPOX(R)-30 ARE TRADEMARKS AND SERVICE
MARKS OF IPOX(R) SCHUSTER LLC (www.ipoxshuster.com) AND HAVE BEEN LICENSED FOR
CERTAIN PURPOSES FROM IPOX(R) SCHUSTER LLC TO FIRST TRUST PURSUANT TO THE
PRODUCT LICENSE AGREEMENT.
A patent with respect to the IPOX(R) index methodology has been issued
(U.S. Pat. No. 7,698,197). IPOX(R) is a registered international trademark of
IPOX(R) Schuster LLC (www.ipoxschuster.com).
Value Line(R) 100 Fund, Value Line(R) Dividend Fund and Value Line(R)
Equity Allocation Fund Disclaimer
VALUE LINE PUBLISHING LLC'S ("VLP") ONLY RELATIONSHIP TO FIRST TRUST IS
VLP'S LICENSING TO FIRST TRUST OF CERTAIN VLP TRADEMARKS AND TRADE NAMES AND THE
VALUE LINE(R) EQUITY ALLOCATION INDEX, THE VALUE LINE(R) DIVIDEND INDEX AND
VALUE LINE(R) 100 INDEX (THE "INDEXES"), WHICH ARE COMPOSED BY VLP WITHOUT
REGARD TO FIRST TRUST, THE FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX
FUND, THE FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND AND THE FIRST TRUST
-29-
VALUE LINE(R) 100 EXCHANGE-TRADED FUND (THE "PRODUCTS") OR ANY INVESTOR. VLP HAS
NO OBLIGATION TO TAKE THE NEEDS OF FIRST TRUST OR ANY INVESTOR IN THE PRODUCTS
INTO CONSIDERATION IN COMPOSING THE INDEXES. THE PRODUCTS RESULTS MAY DIFFER
FROM THE HYPOTHETICAL OR PUBLISHED RESULTS OF THE INDEXES. VLP IS NOT
RESPONSIBLE FOR HOW FIRST TRUST MAKES USE OF INFORMATION SUPPLIED BY VLP. VLP IS
NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES
AND COMPOSITION OF THE PRODUCTS OR THE TIMING OF THE ISSUANCE FOR SALE OF THE
PRODUCTS OR IN THE CALCULATION OF THE EQUATIONS BY WHICH THE PRODUCTS IS TO BE
CONVERTED INTO CASH. VLP MAKES NO WARRANTY CONCERNING THE INDEXES, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY PERSON'S INVESTMENT
PORTFOLIO, OR ANY IMPLIED WARRANTIES ARISING FROM USAGE OF TRADE, COURSE OF
DEALING OR COURSE OF PERFORMANCE, AND VLP MAKES NO WARRANTY AS TO THE POTENTIAL
PROFITS OR ANY OTHER BENEFITS THAT MAY BE ACHIEVED BY USING THE INDEX OR ANY
INFORMATION OR MATERIALS GENERATED THEREFROM. VLP DOES NOT WARRANT THAT THE
INDEX WILL MEET ANY REQUIREMENTS OR BE ACCURATE OR ERROR-FREE. VLP ALSO DOES NOT
GUARANTEE ANY USES, INFORMATION, DATA OR OTHER RESULTS GENERATED FROM THE INDEX
OR PRODUCT. VLP HAS NO OBLIGATION OR LIABILITY (I) IN CONNECTION WITH THE
ADMINISTRATION, MARKETING OR TRADING OF THE PRODUCT; OR (II) FOR ANY LOSS,
DAMAGE, COST OR EXPENSE SUFFERED OR INCURRED BY ANY INVESTOR OR OTHER PERSON OR
ENTITY IN CONNECTION WITH THIS PRODUCT, AND IN NO EVENT SHALL VLP BE LIABLE FOR
ANY LOST PROFITS OR OTHER CONSEQUENTIAL, SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT
OR EXEMPLARY DAMAGES IN CONNECTION WITH THE INDEXES OR THE PRODUCTS.
VALUE LINE IS A REGISTERED TRADEMARK OF VALUE LINE, INC. THAT IS LICENSED
TO FIRST TRUST. THE PRODUCTS ARE NOT SPONSORED, RECOMMENDED, SOLD OR PROMOTED BY
VALUE LINE PUBLISHING LLC, VALUE LINE, INC., OR ANY OF THEIR AFFILIATES. FIRST
TRUST IS NOT AFFILIATED WITH ANY VALUE LINE COMPANY.
INVESTMENT RISKS
Overview
An investment in a Fund should be made with an understanding of the risks
that an investment in the Fund shares entails, including the risk that the
financial condition of the issuers of the securities or the general condition of
the securities market may worsen and the value of the securities and therefore
the value of a Fund may decline. A Fund may not be an appropriate investment for
those who are unable or unwilling to assume the risks involved generally with
-30-
such an investment. The past market and earnings performance of any of the
securities included in a Fund is not predictive of their future performance.
Common Stocks
Equity securities are especially susceptible to general market movements
and to volatile increases and decreases of value as market confidence in and
perceptions of the issuers change. These perceptions are based on unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic or banking crises. First
Trust cannot predict the direction or scope of any of these factors.
Shareholders of common stocks have rights to receive payments from the issuers
of those common stocks that are generally subordinate to those of creditors of,
or holders of debt obligations or preferred stocks of, such issuers.
Shareholders of common stocks of the type held by the Funds have a right
to receive dividends only when and if, and in the amounts, declared by the
issuer's board of directors and have a right to participate in amounts available
for distribution by the issuer only after all other claims on the issuer have
been paid. Common stocks do not represent an obligation of the issuer and,
therefore, do not offer any assurance of income or provide the same degree of
protection of capital as do debt securities. The issuance of additional debt
securities or preferred stock will create prior claims for payment of principal,
interest and dividends which could adversely affect the ability and inclination
of the issuer to declare or pay dividends on its common stock or the rights of
holders of common stock with respect to assets of the issuer upon liquidation or
bankruptcy. The value of common stocks is subject to market fluctuations for as
long as the common stocks remain outstanding, and thus the value of the equity
securities in the Funds will fluctuate over the life of the Funds and may be
more or less than the price at which they were purchased by the Funds. The
equity securities held in the Funds may appreciate or depreciate in value (or
pay dividends) depending on the full range of economic and market influences
affecting these securities, including the impact of a Fund's purchase and sale
of the equity securities and other factors.
Holders of common stocks incur more risk than holders of preferred stocks
and debt obligations because common stockholders, as owners of the entity, have
generally inferior rights to receive payments from the issuer in comparison with
the rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Cumulative preferred stock dividends must be paid before
common stock dividends and any cumulative preferred stock dividend omitted is
added to future dividends payable to the holders of cumulative preferred stock.
Preferred stockholders are also generally entitled to rights on liquidation
which are senior to those of common stockholders.
ADDITIONAL RISKS OF INVESTING IN THE FUNDS
Depositary Receipts Risk
The Funds may hold securities of certain non-U.S. companies in the form of
Depositary Receipts. Depositary Receipts may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by an American bank or trust company that
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evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued by a European bank or trust company evidencing
ownership of securities issued by a foreign corporation. New York shares are
typically issued by a company incorporated in the Netherlands and represent a
direct interest in the company. Unlike traditional depositary receipts, New York
share programs do not involve custody of the Dutch shares of the company. GDRs
are receipts issued throughout the world that evidence a similar arrangement.
ADRs, EDRs and GDRs may trade in foreign currencies that differ from the
currency the underlying security for each ADR, EDR or GDR principally trades in.
Global shares are the actual (ordinary) shares of a non-U.S. company, which
trade both in the home market and the United States. Generally, ADRs and New
York shares, in registered form, are designed for use in the U.S. securities
markets. EDRs, in registered form, are used to access European markets. GDRs, in
registered form, are tradable both in the United States and in Europe and are
designed for use throughout the world. Global shares are represented by the same
share certificate in the United States and the home market. Separate registrars
in the United States and the home country are maintained. In most cases,
purchases occurring on a U.S. exchange would be reflected on the U.S. registrar.
Global shares may also be eligible to list on exchanges in addition to the
United States and the home country. The Funds may hold unsponsored Depositary
Receipts. The issuers of unsponsored Depositary Receipts are not obligated to
disclose material information in the United States; therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Liquidity Risk
Whether or not the equity securities in the Funds are listed on a
securities exchange, the principal trading market for certain of the equity
securities in certain of the Funds may be in the over-the-counter ("OTC")
market. As a result, the existence of a liquid trading market for the equity
securities may depend on whether dealers will make a market in the equity
securities. There can be no assurance that a market will be made for any of the
equity securities, that any market for the equity securities will be maintained
or that there will be sufficient liquidity of the equity securities in any
markets made. The price at which the equity securities are held in the Funds
will be adversely affected if trading markets for the equity securities are
limited or absent.
Non-U.S. Securities Risk
An investment in non-U.S. securities involves risks in addition to the
usual risks inherent in domestic investments, including currency risk. The value
of a non-U.S. security in U.S. dollars tends to decrease when the value of the
U.S. dollar rises against the non-U.S. currency in which the security is
denominated and tends to increase when the value of the U.S. dollar falls
against such currency. Non-U.S. securities are affected by the fact that in many
countries there is less publicly available information about issuers than is
available in the reports and ratings published about companies in the United
States and companies may not be subject to uniform accounting, auditing and
financial reporting standards. Other risks inherent in non-U.S. investments
include expropriation; confiscatory taxation; withholding taxes on dividends and
interest; less extensive regulation of non-U.S. brokers, securities markets and
issuers; diplomatic developments; and political or social instability. Non-U.S.
-32-
economies may differ favorably or unfavorably from the U.S. economy in various
respects, and many non-U.S. securities are less liquid and their prices tend to
be more volatile than comparable U.S. securities. From time to time, non-U.S.
securities may be difficult to liquidate rapidly without adverse price effects.
Passive Foreign Investment Companies Risk.
The Funds may invest in companies that are considered to be "passive
foreign investment companies" ("PFICs"), which are generally certain non-U.S.
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income. Therefore, the Funds could be subject to U.S. federal income tax
and additional interest charges on gains and certain distributions with respect
to those equity interests, even if all the income or gain is distributed to its
shareholders in a timely manner. A Fund will not be able to pass through to its
shareholders any credit or deduction for such taxes.
Real Estate Investment Trust ("REIT") Risk
REITs are financial vehicles that pool investors' capital to purchase or
finance real estate. REITs may concentrate their investments in specific
geographic areas or in specific property types, e.g., hotels, shopping malls,
residential complexes and office buildings. The market value of REIT shares and
the ability of the REITs 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 of the safety, convenience and attractiveness of the
properties; the ability of the owners 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; and
other factors beyond the control of the issuers of the REITs. In addition,
distributions received by the Funds from REITs may consist of dividends, capital
gains and/or return of capital. Many of these distributions however will not
generally qualify for favorable treatment as qualified dividend income.
Small Capitalization Companies
Certain of the equity securities in certain Funds may be small cap company
stocks. While historically small cap company stocks have outperformed the stocks
of large companies, the former have customarily involved more investment risk as
well. Small cap companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than large companies. Some of
these companies may distribute, sell or produce products that have recently been
brought to market and may be dependent on key personnel.
The prices of small company securities are often more volatile than prices
associated with large company issues, and can display abrupt or erratic
movements at times, due to limited trading volumes and less publicly available
-33-
information. Also, because small cap companies normally have fewer shares
outstanding and these shares trade less frequently than large companies, it may
be more difficult for a Fund which contains these equity securities to buy and
sell significant amounts of such shares without an unfavorable impact on
prevailing market prices. The securities of small companies are often traded OTC
and may not be traded in the volumes typical of a national securities exchange.
RISKS AND SPECIAL CONSIDERATIONS CONCERNING DERIVATIVES
In addition to the foregoing, the use of derivative instruments involves
certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of the
underlying assets may go up or down. Adverse movements in the value of an
underlying asset can expose the Funds to losses. Derivative instruments
may include elements of leverage and, accordingly, fluctuations in the
value of the derivative instrument in relation to the underlying asset may
be magnified. The successful use of derivative instruments depends upon a
variety of factors, particularly the portfolio managers' ability to
predict movements of the securities, currencies, and commodities markets,
which may require different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular
strategy adopted will succeed. A decision to engage in a derivative
transaction will reflect the portfolio managers' judgment that the
derivative transaction will provide value to a Fund and its shareholders
and is consistent with a Fund's objective, investment limitations, and
operating policies. In making such a judgment, the portfolio managers will
analyze the benefits and risks of the derivative transactions and weigh
them in the context of a Fund's overall investments and investment
objective.
(2) Credit Risk/Counterparty Risk. Credit risk is the risk that a
loss may be sustained as a result of the failure of a counterparty to
comply with the terms of a derivative instrument. The counterparty risk
for exchange-traded derivatives is generally less than for
privately-negotiated or OTC derivatives, since generally a clearing
agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all
transactions, the Funds will bear the risk that the counterparty will
default, and this could result in a loss of the expected benefit of the
derivative transactions and possibly other losses to the Funds. The Funds
will enter into transactions in derivative instruments only with
counterparties that First Trust reasonably believes are capable of
performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there might
be an imperfect correlation, or even no correlation, between price
movements of a derivative instrument and price movements of investments
being hedged. When a derivative transaction is used to completely hedge
another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments.
-34-
With a perfect hedge, the value of the combined position remains unchanged
with any change in the price of the underlying asset. With an imperfect
hedge, the value of the derivative instrument and its hedge are not
perfectly correlated. For example, if the value of a derivative instrument
used in a short hedge (such as writing a call option, buying a put option
or selling a Futures Contract) increased by less than the decline in value
of the hedged investments, the hedge would not be perfectly correlated.
This might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in
which these instruments are traded. The effectiveness of hedges using
instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and the price movements in the
investments being hedged.
(4) Liquidity Risk. Liquidity risk is the risk that a derivative
instrument cannot be sold, closed out, or replaced quickly at or very
close to its fundamental value. Generally, exchange contracts are very
liquid because the exchange clearinghouse is the counterparty of every
contract. OTC transactions are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party
to the transaction. The Funds might be required by applicable regulatory
requirements to maintain assets as "cover," maintain segregated accounts,
and/or make margin payments when they take positions in derivative
instruments involving obligations to third parties (i.e., instruments
other than purchase options). If a Fund is unable to close out its
positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expires, matures, or is closed out. These requirements might impair a
Fund's ability to sell a security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Fund sell a
portfolio security at a disadvantageous time. A Fund's ability to sell or
close out a position in an instrument prior to expiration or maturity
depends upon the existence of a liquid secondary market or, in the absence
of such a market, the ability and willingness of the counterparty to enter
into a transaction closing out the position. Due to liquidity risk, there
is no assurance that any derivatives position can be sold or closed out at
a time and price that is favorable to a Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside in
exchange for downside protection, the party taking the risk is looking for
a positive payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative transaction may try to
avoid payment by exploiting various legal uncertainties about certain
derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or interconnection
risk is the risk that a disruption in the financial markets will cause
difficulties for all market participants. In other words, a disruption in
one market will spill over into other markets, perhaps creating a chain
reaction. Much of the OTC derivatives market takes place among the OTC
dealers themselves, thus creating a large interconnected web of financial
obligations. This interconnectedness raises the possibility that a default
-35-
by one large dealer could create losses for other dealers and destabilize
the entire market for OTC derivative instruments.
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS
The general supervision of the duties performed for the Funds under the
investment management agreement is the responsibility of the Board of Trustees.
There are five Trustees of the Trust, one of whom is an "interested person" (as
the term is defined in the 1940 Act) and four of whom are Trustees who are not
officers or employees of First Trust or any of its affiliates ("Independent
Trustees"). The Trustees set broad policies for the Funds, choose the Trust's
officers and hire the Trust's investment advisor. The officers of the Trust
manage its day to day operations and are responsible to the Trust's Board of
Trustees. The following is a list of the Trustees and executive officers of the
Trust and a statement of their present positions and principal occupations
during the past five years, the number of portfolios each Trustee oversees and
the other directorships they have held during the past five years, if
applicable. Each Trustee has been elected for an indefinite term. The officers
of the Trust serve indefinite terms. Each Trustee, except for James A. Bowen, is
an Independent Trustee. Mr. Bowen is deemed an "interested person" (as that term
is defined in the 1940 Act) ("Interested Trustee") of the Trust due to his
position as Chief Executive Officer of First Trust, investment advisor to the
Funds.
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS OTHER
IN THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE TRUST FUND DIRECTORSHIPS
AND YEAR FIRST COMPLEX HELD BY TRUSTEE
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING THE PAST
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
Trustee who is an
Interested Person of the
Trust
--------------------------
James A. Bowen(1) Chairman of the o Indefinite Chief Executive 106 None
120 East Liberty Drive, Board and Trustee term Officer (December
Wheaton, IL 60187 2010 to Present),
D.O.B.: 09/55 President (until
o 2003 December 2010), First
Trust Advisors L.P.
and First Trust
Portfolios L.P.;
Chairman of the Board
of Directors,
BondWave LLC
(Software Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
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[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS OTHER
IN THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE TRUST FUND DIRECTORSHIPS
AND YEAR FIRST COMPLEX HELD BY TRUSTEE
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING THE PAST
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
Independent Trustees
--------------------------
Richard E. Erickson Trustee o Indefinite Physician; President, 106 None
c/o First Trust Advisors term Wheaton Orthopedics;
L.P. Co-owner and
120 East Liberty Drive, Co-Director (January
Suite 400 o 2005 1996 to May 2007),
Wheaton, IL 60187 Sports Med Center for
D.O.B.: 04/51 Fitness; Limited
Partner, Gundersen
Real Estate Limited
Partnership; Member,
Sportsmed LLC
106
Thomas R. Kadlec Trustee o Indefinite President (March 2010 Director of
c/o First Trust Advisors term to Present), Senior ADM Investor
L.P. Vice President and Services, Inc.
120 East Liberty Drive, o 2005 Chief Financial and ADM
Suite 400 Officer (May 2007 to Investor
Wheaton, IL 60187 March 2010), Vice Services
D.O.B.: 11/57 President and Chief International
Financial Officer
(1990 to May 2007),
ADM Investor
Services, Inc.
(Futures Commission
Merchant)
106
Robert F. Keith Trustee o Indefinite President (2003 to Director of
c/o First Trust Advisors term Present), Hibs Trust Company
L.P. Enterprises of Illinois
120 East Liberty Drive, o 2006 (Financial and
Suite 400 Management
Wheaton, IL 60187 Consulting)
D.O.B.: 11/56
106
Niel B. Nielson Trustee o Indefinite President and Chief Director of
c/o First Trust Advisors term Executive Officer Covenant
L.P. (July 2012 to Transport Inc.
120 East Liberty Drive, o 2005 Present), Dew
Suite 400 Learning LLC
Wheaton, IL 60187 (Educational Products
D.O.B.: 03/54 and Services);
President (June 2002
to June 2012),
Covenant College
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[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS OTHER
IN THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE TRUST FUND DIRECTORSHIPS
AND YEAR FIRST COMPLEX HELD BY TRUSTEE
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING THE PAST
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
Officers of the Trust
--------------------------
Mark R. Bradley President and o Indefinite Chief Financial N/A N/A
120 East Liberty Drive, Chief Executive term Officer, Chief
L.P. Officer Operating Officer
Wheaton, IL 60187 (December 2010 to
D.O.B.: 11/57 o President Present), First Trust
and Chief Advisors L.P. and
Executive First Trust
Officer Portfolios L.P.;
since Chief Financial
January 2012 Officer, BondWave LLC
(Software Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
James M. Dykas Treasurer, Chief o Indefinite Controller (January N/A N/A
120 East Liberty Drive, Financial Officer term 2011 to Present),
Suite 400 and Chief Senior Vice President
Wheaton, IL 60187 Accounting o Treasurer, (April 2007 to
D.O.B.: 01/66 Officer Chief Present), First Trust
Financial Advisors L.P. and
Officer and First Trust
Chief Portfolios L.P
Accounting
Officer
since
January 2012
W. Scott Jardine Secretary and o Indefinite General Counsel, N/A N/A
120 East Liberty Drive, Chief Legal term First Trust Advisors
Suite 400 Officer L.P. and First Trust
Wheaton, IL 60187 o 2005 Portfolios L.P.;
D.O.B.: 05/60 Secretary and General
Counsel, BondWave LLC
(Software Development
Company/Investment
Advisor) and
Secretary,
Stonebridge Advisors
LLC (Investment
Advisor)
Daniel J. Lindquist Vice President o Indefinite Managing Director N/A N/A
120 East Liberty Drive, term (July 2012 to
Suite 400 Present), Senior Vice
Wheaton, IL 60187 o 2005 President (September
D.O.B.: 02/70 2005 to July 2012),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.
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[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS OTHER
IN THE FIRST TRUSTEESHIPS OR
TERM OF OFFICE TRUST FUND DIRECTORSHIPS
AND YEAR FIRST COMPLEX HELD BY TRUSTEE
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING THE PAST
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
Kristi A. Maher Chief Compliance o Indefinite Deputy General N/A N/A
120 East Liberty Drive, Officer and term Counsel, First Trust
Suite 400 Assistant Advisors L.P. and
Wheaton, IL 60187 Secretary o Assistant First Trust
D.O.B.: 12/66 Secretary Portfolios L.P.
since 2005;
Chief
Compliance
Officer
since
January 2011
Roger F. Testin Vice President o Indefinite Senior Vice N/A N/A
120 East Liberty Drive, term President, First
Suite 400 Trust Advisors L.P.
Wheaton, IL 60187 o 2005 and First Trust
D.O.B.: 06/66 Portfolios L.P.
Stan Ueland Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (September 2012 to
Suite 400 Present), Vice
Wheaton, IL 60187 o 2006 President (August
D.O.B.: 11/70 2005 to September
2012), First Trust
Advisors L.P. and
First Trust
Portfolios L.P.
-------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust, investment advisor of
the Funds.
UNITARY BOARD LEADERSHIP STRUCTURE
Each Trustee serves as a trustee of all open-end and closed-end funds in
the First Trust Fund Complex (as defined below), which is known as a "unitary"
board leadership structure. Each Trustee currently serves as a trustee of First
Trust Series Fund and First Trust Variable Insurance Trust open-end funds with 5
portfolios advised by First Trust; First Trust Senior Floating Rate Income Fund
II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income
Fund, First Trust Energy Income and Growth Fund, First Trust Enhanced Equity
Income Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust
Mortgage Income Fund, First Trust Strategic High Income Fund II, First
Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance and
Financial Opportunities Fund, First Trust Dividend and Income Fund, First Trust
High Income Long/Short Fund, First Trust Energy Infrastructure Fund, First Trust
MLP and Energy Income Fund, First Trust Intermediate Duration Preferred & Income
Fund and First Trust New Opportunities MLP & Energy Fund, closed-end funds
advised by First Trust; and the Trust, First Trust Exchange-Traded Fund II,
First Trust Exchange-Traded Fund III, First Trust Exchange-Traded Fund IV, First
Trust Exchange-Traded Fund V, First Trust Exchange Traded Fund VI, First Trust
Exchange-Traded Fund VII, First Trust Exchange-Traded AlphaDEX(R) Fund and First
Trust Exchange-Traded AlphaDEX(R) Fund II, exchange-traded funds with 86
portfolios advised by First Trust (the "First Trust Funds" or the "First Trust
-39-
Fund Complex"). None of the Trustees who are not "interested persons" of the
Trust, nor any of their immediate family members, has ever been a director,
officer or employee of, or consultant to, First Trust, First Trust Portfolios
L.P. or their affiliates.
The management of the Funds, including general supervision of the duties
performed for the Funds under the investment management agreement between the
Trust, on behalf of the Funds, and the Advisor, is the responsibility of the
Board of Trustees. The Trustees of the Trust set broad policies for the Funds,
choose the Trust's officers, and hire the Funds' investment advisor and other
service providers. The officers of the Trust manage the day-to-day operations
and are responsible to the Trust's Board. The Trust's Board is composed of four
Independent Trustees and one Interested Trustee. The Interested Trustee, James
A. Bowen, serves as the Chairman of the Board for each fund in the First Trust
Fund Complex.
The same five persons serve as Trustees on the Trust's Board and on the
Boards of all other First Trust Funds. The unitary board structure was adopted
for the First Trust Funds because of the efficiencies it achieves with respect
to the governance and oversight of the First Trust Funds. Each First Trust Fund
is subject to the rules and regulations of the 1940 Act (and other applicable
securities laws), which means that many of the First Trust Funds face similar
issues with respect to certain of their fundamental activities, including risk
management, portfolio liquidity, portfolio valuation and financial reporting.
Because of the similar and often overlapping issues facing the First Trust
Funds, including among the First Trust exchange-traded funds, the Board of the
First Trust Funds believes that maintaining a unitary board structure promotes
efficiency and consistency in the governance and oversight of all First Trust
Funds and reduces the costs, administrative burdens and possible conflicts that
may result from having multiple boards. In adopting a unitary board structure,
the Trustees seek to provide effective governance through establishing a board
the overall composition of which will, as a body, possesses the appropriate
skills, diversity, independence and experience to oversee the Funds' business.
Annually, the Board reviews its governance structure and the committee
structures, their performance and functions and reviews any processes that would
enhance Board governance over the Funds' business. The Board has determined that
its leadership structure, including the unitary board and committee structure,
is appropriate based on the characteristics of the Funds it serves and the
characteristics of the First Trust Fund Complex as a whole.
In order to streamline communication between the Advisor and the
Independent Trustees and create certain efficiencies, the Board has a Lead
Independent Trustee who is responsible for: (i) coordinating activities of the
Independent Trustees; (ii) working with the Advisor, Fund counsel and the
independent legal counsel to the Independent Trustees to determine the agenda
for Board meetings; (iii) serving as the principal contact for and facilitating
communication between the Independent Trustees and the Funds' service providers,
particularly the Advisor; and (iv) any other duties that the Independent
Trustees may delegate to the Lead Independent Trustee. The Lead Independent
Trustee is selected by the Independent Trustees and serves a three-year term or
until his successor is selected.
The Board has established four standing committees (as described below)
and has delegated certain of its responsibilities to those committees. The Board
and its committees meet frequently throughout the year to oversee the Funds'
-40-
activities, review contractual arrangements with and performance of service
providers, oversee compliance with regulatory requirements, and review Fund
performance. The Independent Trustees are represented by independent legal
counsel at all Board and committee meetings (other than meetings of the
Executive Committee). Generally, the Board acts by majority vote of all the
Trustees, including a majority vote of the Independent Trustees if required by
applicable law.
Commencing January 1, 2014, the three Committee Chairmen and the Lead
Independent Trustee rotate every three years in serving as Chairman of the Audit
Committee, the Nominating and Governance Committee or the Valuation Committee,
or as Lead Independent Trustee. The Lead Independent Trustee and the immediate
past Lead Independent Trustee also serve on the Executive Committee with the
Interested Trustee.
The four standing committees of the First Trust Fund Complex are: the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Trust's Declaration of Trust and By Laws. Such Committee
is also responsible for the declaration and setting of dividends. Mr. Kadlec,
Mr. Bowen and Mr. Keith are members of the Executive Committee. During the last
fiscal year, the Executive Committee held 15 meeting.
The Nominating and Governance Committee is responsible for appointing and
nominating non-interested persons to the Trust's Board of Trustees. Messrs.
Erickson, Kadlec, Keith and Nielson are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including shareholders. The
Board of Trustees adopted a mandatory retirement age of 72 for Trustees, beyond
which age Trustees are ineligible to serve. The Committee will not consider new
trustee candidates who are 72 years of age or older. When a vacancy on the Board
of Trustees of a First Trust Fund occurs and nominations are sought to fill such
vacancy, the Nominating and Governance Committee may seek nominations from those
sources it deems appropriate in its discretion, including shareholders of the
applicable fund. To submit a recommendation for nomination as a candidate for a
position on the Board of Trustees, shareholders of the applicable Fund shall
mail such recommendation to W. Scott Jardine, Secretary, at the Trust's address,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation
shall include the following information: (i) evidence of Fund ownership of the
person or entity recommending the candidate (if a Fund shareholder); (ii) a full
description of the proposed candidate's background, including their education,
experience, current employment and date of birth; (iii) names and addresses of
at least three professional references for the candidate; (iv) information as to
whether the candidate is an "interested person" in relation to the fund, as such
term is defined in the 1940 Act, and such other information that may be
considered to impair the candidate's independence; and (v) any other information
that may be helpful to the Committee in evaluating the candidate. If a
recommendation is received with satisfactorily completed information regarding a
candidate during a time when a vacancy exists on the Board or during such other
time as the Nominating and Governance Committee is accepting recommendations,
-41-
the recommendation will be forwarded to the Chairman of the Nominating and
Governance Committee and the counsel to the Independent Trustees.
Recommendations received at any other time will be kept on file until such time
as the Nominating and Governance Committee is accepting recommendations, at
which point they may be considered for nomination. During the last fiscal year,
the Nominating and Governance Committee held 4 meetings.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members
of the Valuation Committee. During the last fiscal year, the Valuation Committee
held 4 meetings.
The Audit Committee is responsible for overseeing each Fund's accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to Board
approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit
Committee. During the last fiscal year, the Audit Committee held 11 meetings.
EXECUTIVE OFFICERS
The executive officers of the Trust hold the same positions with each fund
in the First Trust Fund Complex (representing 106 portfolios) as they hold with
the Trust.
RISK OVERSIGHT
As part of the general oversight of the Funds, the Board is involved in
the risk oversight of the Funds. The Board has adopted and periodically reviews
policies and procedures designed to address each Fund's risks. Oversight of
investment and compliance risk is performed primarily at the Board level in
conjunction with the Advisor's investment oversight group and the Trust's Chief
Compliance Officer ("CCO"). Oversight of other risks also occurs at the
committee level. The Advisor's investment oversight group reports to the Board
at quarterly meetings regarding, among other things, Fund performance and the
various drivers of such performance. The Board reviews reports on the Funds' and
the service providers' compliance policies and procedures at each quarterly
Board meeting and receives an annual report from the CCO regarding the
operations of the Funds' and the service providers' compliance program. In
addition, the Independent Trustees meet privately each quarter with the CCO. The
Audit Committee reviews with the Advisor each Fund's major financial risk
exposures and the steps the Advisor has taken to monitor and control these
exposures, including each Fund's risk assessment and risk management policies
and guidelines. The Audit Committee also, as appropriate, reviews in a general
manner the processes other Board committees have in place with respect to risk
assessment and risk management. The Nominating and Governance Committee monitors
all matters related to the corporate governance of the Funds. The Valuation
Committee monitors valuation risk and compliance with the Funds' Valuation
Procedures and oversees the pricing services and actions by the Advisor's
Pricing Committee with respect to the valuation of portfolio securities.
Not all risks that may affect the Funds can be identified nor can controls
be developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
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processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Funds or the Advisor or other service providers. Moreover, it is necessary to
bear certain risks (such as investment related risks) to achieve a Fund's goals.
As a result of the foregoing and other factors, the Funds' ability to manage
risk is subject to substantial limitations.
BOARD DIVERSIFICATION AND TRUSTEE QUALIFICATIONS
As described above, the Nominating and Governance Committee of each Board
oversees matters related to the nomination of Trustees. The Nominating and
Governance Committee seeks to establish an effective Board with an appropriate
range of skills and diversity, including, as appropriate, differences in
background, professional experience, education, vocations, and other individual
characteristics and traits in the aggregate. Each Trustee must meet certain
basic requirements, including relevant skills and experience, time availability,
and if qualifying as an Independent Trustee, independence from the Advisor,
underwriters or other service providers, including any affiliates of these
entities.
Listed below for each current Trustee are the experiences, qualifications
and attributes that led to the conclusion, as of the date of this SAI, that each
current Trustee should serve as a trustee in light of the Funds' business and
structure.
Independent Trustees.
Richard E. Erickson, M.D., is an orthopedic surgeon and President of
Wheaton Orthopedics. He also has been a co-owner and director of a fitness
center and a limited partner of two real estate companies. Dr. Erickson has
served as a Trustee of each First Trust Fund since its inception. Dr. Erickson
has also served as the Lead Independent Trustee and on the Executive Committee
(2008 - 2009), Chairman of the Nominating and Governance Committee (2003 -
2007), Chairman of the Audit Committee (2012 - 2013) and Chairman of the
Valuation Committee (June 2006 - 2007 and 2010 - 2011) of the First Trust Funds.
He currently serves as Chairman of the Nominating and Governance Committee
(since January 1, 2014) of the First Trust Funds.
Thomas R. Kadlec is President of ADM Investor Services Inc. ("ADMIS"), a
futures commission merchant and wholly-owned subsidiary of the Archer Daniels
Midland Company ("ADM"). Mr. Kadlec has been employed by ADMIS and its
affiliates since 1990 in various accounting, financial, operations and risk
management capacities. Mr. Kadlec serves on the boards of several international
affiliates of ADMIS and is a member of ADM's Integrated Risk Committee, which is
tasked with the duty of implementing and communicating enterprise-wide risk
management. Mr. Kadlec has served as a Trustee of each First Trust Fund. Mr.
Kadlec also served on the Executive Committee from the organization of the first
First Trust closed-end fund in 2003 until he was elected as the first Lead
Independent Trustee in December 2005, serving as such through 2007. He also
served as Chairman of the Valuation Committee (2008 - 2009), Chairman of the
Audit Committee (2010 - 2011) and Chairman of the Nominating and Governance
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Committee (2012 - 2013) and he currently serves as Lead Independent Trustee and
on the Executive Committee (since January 1, 2014) of the First Trust Funds.
Robert F. Keith is President of Hibs Enterprises, a financial and
management consulting firm. Mr. Keith has been with Hibs Enterprises since 2003.
Prior thereto, Mr. Keith spent 18 years with ServiceMaster and Aramark,
including three years as President and COO of ServiceMaster Consumer Services,
where he led the initial expansion of certain products overseas, five years as
President and COO of ServiceMaster Management Services and two years as
President of Aramark ServiceMaster Management Services. Mr. Keith is a certified
public accountant and also has held the positions of Treasurer and Chief
Financial Officer of ServiceMaster, at which time he oversaw the financial
aspects of ServiceMaster's expansion of its Management Services division in to
Europe, the Middle East and Asia. Mr. Keith has served as a Trustee of the First
Trust Funds since June 2006. Mr. Keith has also served as the Chairman of the
Audit Committee (2008 - 2009) and Chairman of the Nominating and Governance
Committee (2010 - 2011) of the First Trust Funds. He served as Lead Independent
Trustee and on the Executive Committee (2012 - 2013) and currently serves as
Chairman of the Valuation Committee (since January 1, 2014) and on the Executive
Committee (since January 31, 2014) of the First Trust Funds.
Niel B. Nielson, Ph.D., has served as the President and Chief Executive
Officer of Dew Learning LLC (a global provider of digital and on-line
educational products and services) since 2012. Mr. Nielson formerly served as
President of Covenant College (2002 - 2012), and as a partner and trader (of
options and Futures Contracts for hedging options) for Ritchie Capital Markets
Group (1996 - 1997), where he held an administrative management position at this
proprietary derivatives trading company. He also held prior positions in new
business development for ServiceMaster Management Services Company, and in
personnel and human resources for NationsBank of North Carolina, N.A. and
Chicago Research and Trading Group, Ltd. ("CRT"). His international experience
includes serving as a director of CRT Europe, Inc. for two years, directing out
of London all aspects of business conducted by the U.K. and European subsidiary
of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago.
Mr. Nielson has served as a Trustee of each First Trust Fund since its inception
and of the First Trust Funds since 1999. Mr. Nielson has also served as the
Chairman of the Audit Committee (2003 - 2006), Chairman of the Valuation
Committee (2007 - 2008 and 2012-2013), Chairman of the Nominating and Governance
Committee (2008 - 2009) and Lead Independent Trustee and a member of the
Executive Committee (2010 - 2011). He currently serves as Chairman of the Audit
Committee (since January 1, 2014) of the First Trust Funds.
Interested Trustee.
James A. Bowen is Chief Executive Officer of First Trust Advisors L.P. and
First Trust Portfolios L.P. Mr. Bowen is involved in the day-to-day management
of the First Trust Funds and serves on the Executive Committee. He has over 26
years of experience in the investment company business in sales, sales
management and executive management. Mr. Bowen has served as a Trustee of each
First Trust Fund since its inception and of the First Trust Funds since 1999.
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Each Independent Trustee is paid a fixed annual retainer of $125,000 per
year and an annual per fund fee of $4,000 for each closed-end fund or other
actively managed fund and $1,000 for each index fund in the First Trust Fund
Complex. The fixed annual retainer is allocated pro rata among each fund in the
First Trust Fund Complex based on net assets. Additionally, the Lead Independent
Trustee is paid $15,000 annually, the Chairman of the Audit Committee is paid
$10,000 annually, and each of the Chairmen of the Nominating and Governance
Committee and the Valuation Committee is paid $5,000 annually to serve in such
capacities, with such compensation allocated pro rata among each fund in the
First Trust Fund Complex based on net assets. Trustees are also reimbursed by
the investment companies in the First Trust Fund Complex for travel and
out-of-pocket expenses incurred in connection with all meetings.
The following table sets forth the estimated compensation (including
reimbursement for travel and out-of-pocket expenses) paid by the Funds and the
actual compensation paid by the First Trust Fund Complex to the Independent
Trustees for the calendar year ended December 31, 2013, respectively. The Trust
has no retirement or pension plans. The officers and Trustee who are "interested
persons" as designated above serve without any compensation from the Trust. The
Trust has no employees. Its officers are compensated by First Trust.
[Download Table]
TOTAL COMPENSATION FROM TOTAL COMPENSATION FROM
NAME OF TRUSTEE THE FUNDS(1) THE FIRST TRUST FUND COMPLEX(2)
Richard E. Erickson $53,806 $306,162
Thomas R. Kadlec $52,104 $299,500
Robert F. Keith $54,856 $310,300
Niel B. Nielson $53,335 $304,334
--------------------
(1) The compensation paid by the Funds to the Independent Trustees for the
fiscal year ended December 31, 2013 for services to the Funds.
(2) The total compensation paid to the Independent Trustees for the calendar
year ended December 31, 2013 for services to the 12 portfolios of First
Defined Portfolio Fund, LLC, First Trust Series Fund and First Trust
Variable Insurance Trust, open-end funds, 14 closed-end funds and 79
series of the Trust, First Trust Exchange-Traded Fund II, First Trust
Exchange-Traded Fund III, First Trust Exchange-Traded Fund IV, First Trust
Exchange-Traded Fund V, First Trust Exchange-Traded Fund VI, First Trust
Exchange-Traded Fund VII First Trust Exchange-Traded AlphaDEX(R) Fund and
First Trust Exchange-Traded AlphaDEX(R) Fund II, all advised by First
Trust.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Funds as of December 31, 2013:
DOLLAR RANGE OF EQUITY SECURITIES IN A FUND
[Enlarge/Download Table]
Capital Dividend Clean Edge(R) Value Line(R)
Strength ETF ISE Water Fund Leaders Fund Fund US IPO Fund 100 Fund
Interested Trustee
James A. Bowen N/A N/A N/A N/A N/A N/A
Independent Trustees
Richard E. Erickson $10,001-$50,000 $10,001-$50,000 $1-$10,000 $10,001-$50,000 N/A $10,001-$50,000
Thomas R. Kadlec N/A N/A N/A N/A N/A $10,001-$50,000
Robert F. Keith N/A N/A $10,001-$50,000 N/A N/A N/A
Niel B. Nielson $1-$10,000 N/A $1-$10,000 N/A $1-$10,000 $1-$10,000
----------------------------------------------------------------------------------------------------------------------------------
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[Enlarge/Download Table]
Value Line(R) Value Line(R) Equity MicroCap Fund ISE Chindia Fund
Dividend Fund Allocation Fund
Interested Trustee
James A. Bowen N/A N/A N/A N/A
Independent Trustees
Richard E. Erickson $10,001-$50,000 N/A N/A N/A
N/A
Thomas R. Kadlec $10,001-$50,000 N/A N/A
Robert F. Keith N/A N/A N/A N/A
$1-$10,000
Niel B. Nielson $1-$10,000 N/A $10,001-$50,000
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Funds and in other funds overseen by
the Trustees in the First Trust Fund Complex as of December 31, 2013:
[Download Table]
DOLLAR RANGE OF EQUITY AGGREGATE DOLLAR RANGE OF
SECURITIES IN THE FUNDS EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEE
IN THE FIRST TRUST FUND
COMPLEX
Interested Trustee
James A. Bowen N/A $10,001 - $50,000
Independent Trustees
Richard E. Erickson Over $100,000 Over $100,000
Thomas R. Kadlec $50,001-$100,000 Over $100,000
Robert F. Keith $10,001-$50,000 Over $100,000
Niel B. Nielson $10,001-$50,000 Over $100,000
As of December 31, 2013, the Independent Trustees of the Trust and
immediate family members did not own beneficially or of record any class of
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securities of an investment advisor or principal underwriter of the Funds or any
person directly or indirectly controlling, controlled by, or under common
control with an investment advisor or principal underwriter of the Funds.
As of December 31, 2013, the officers and Trustees, in the aggregate,
owned less than 1% of the shares of each Fund.
The table set forth in Exhibit A shows the percentage ownership of each
shareholder or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) who, as of March 31, 2014,
owned of record, or is known by the Trust to have owned of record or
beneficially, 5% or more of the shares of a Fund. A control person is one who
owns, either directly or indirectly, more than 25% of the voting securities of a
Fund or acknowledges the existence of control. A party that controls a Fund may
be able to significantly influence the outcome of any item presented to
shareholders for approval. Information as to beneficial ownership is based on
the securities position listing reports as of March 31, 2014. The Funds do not
have any knowledge of who the ultimate beneficiaries are of the shares.
Investment Advisor. First Trust Advisors L.P., 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187, is the investment advisor to the Funds.
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of
DuPage L.P. is a limited partnership with one general partner, The Charger
Corporation, and a number of limited partners. The Charger Corporation is an
Illinois corporation controlled by James A. Bowen, the Chief Executive Officer
of First Trust. First Trust discharges its responsibilities subject to the
policies of the Board of Trustees.
First Trust provides investment tools and portfolios for advisors and
investors. First Trust is committed to theoretically sound portfolio
construction and empirically verifiable investment management approaches. Its
asset management philosophy and investment discipline are deeply rooted in the
application of intuitive factor analysis and model implementation to enhance
investment decisions.
First Trust acts as investment advisor for and manages the investment and
reinvestment of the assets of the Funds. First Trust also administers the
Trust's business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permits any of its
officers or employees to serve without compensation as Trustees or officers of
the Trust if elected to such positions.
Pursuant to an investment management agreement between First Trust and the
Trust (the "Investment Management Agreement"), each Fund has agreed to pay an
annual management fee in the amounts set forth below.
FUND ANNUAL MANAGEMENT FEE
Capital Strength ETF 0.50% of average daily net assets
Tail Hedge Fund 0.60% of average daily net assets
Internet Fund 0.40% of average daily net assets
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FUND ANNUAL MANAGEMENT FEE
MicroCap Fund 0.50% of average daily net assets
ISE Chindia Fund 0.40% of average daily net assets
ISE Gas Fund 0.40% of average daily net assets
ISE Water Fund 0.40% of average daily net assets
Dividend Leaders Fund 0.30% of average daily net assets
Equal Weighted Fund 0.40% of average daily net assets
Ex-Technology Fund 0.40% of average daily net assets
Technology Fund 0.40% of average daily net assets
Community Bank Fund 0.40% of average daily net assets
Clean Edge(R) Fund 0.40% of average daily net assets
Biotech Fund 0.40% of average daily net assets
S&P REIT Fund 0.30% of average daily net assets
US IPO Fund 0.40% of average daily net assets
Value Line(R) 100 Fund 0.50% of average daily net assets
Value Line(R) Dividend Fund 0.50% of average daily net assets
Value Line(R) Equity Allocation Fund 0.50% of average daily net assets
Each Fund, except for the Tail Hedge Fund, is responsible for all its
expenses, including the investment advisory fees, costs of transfer agency,
custody, fund administration, legal, audit and other services, interest, taxes,
sublicensing fees, brokerage commissions and other expenses connected with
executions of portfolio transactions, any distribution fees or expenses and
extraordinary expenses that are both unusual in nature and infrequent in their
occurrence. Until each Fund's Expense Cap Termination Date set forth below,
First Trust has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of each Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes and
extraordinary expenses) from exceeding the Annual Expense Cap amounts set forth
below. Expenses borne and fees waived by First Trust are subject to
reimbursement by a Fund up to three years from the date the fee was waived or
the expense was borne, but no reimbursement payment will be made by a Fund at
any time if it would result in a Fund's expenses exceeding its Expense Cap in
place at the time the fee was waived or the expense was borne by First Trust.
[Enlarge/Download Table]
FUND ANNUAL EXPENSE CAP EXPENSE CAP TERMINATION DATE
Capital Strength ETF 0.65% of average daily net assets April 30, 2015
Tail Hedge Fund N/A N/A
Internet Fund 0.60% of average daily net assets April 30, 2015
MicroCap Fund 0.60% of average daily net assets April 30, 2015
ISE Chindia Fund 0.60% of average daily net assets April 30, 2015
ISE Gas Fund 0.60% of average daily net assets April 30, 2015
ISE Water Fund 0.60% of average daily net assets April 30, 2015
Dividend Leaders Fund 0.45% of average daily net assets April 30, 2015
Equal Weighted Fund 0.60% of average daily net assets April 30, 2015
Ex-Technology Fund 0.60% of average daily net assets April 30, 2015
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[Enlarge/Download Table]
FUND ANNUAL EXPENSE CAP EXPENSE CAP TERMINATION DATE
Technology Fund 0.60% of average daily net assets April 30, 2015
Community Bank Fund 0.60% of average daily net assets April 30, 2015
Clean Edge(R) Fund 0.60% of average daily net assets April 30, 2015
Biotech Fund 0.60% of average daily net assets April 30, 2015
S&P REIT Fund 0.50% of average daily net assets April 30, 2015
US IPO Fund 0.60% of average daily net assets April 30, 2015
Value Line(R) 100 Fund 0.70% of average daily net assets April 30, 2015
Value Line(R) Dividend Fund 0.70% of average daily net assets April 30, 2015
Value Line(R) Equity Allocation Fund 0.70% of average daily net assets April 30, 2015
The following table sets forth the management fees (net of fee waivers and
expense reimbursements, where applicable) paid by each Fund, except the Tail
Hedge Fund, and the fees waived and expenses reimbursed by First Trust for the
specified periods.
[Enlarge/Download Table]
AMOUNT OF MANAGEMENT FEES
(NET OF FEE WAIVERS AND EXPENSE AMOUNT OF FEES WAIVED AND EXPENSES
REIMBURSEMENTS BY FIRST TRUST) REIMBURSED BY FIRST TRUST
----------------------------------------- -----------------------------------------
(FOR THE (FOR THE (FOR THE (FOR THE (FOR THE (FOR THE
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
FUND 12/31/11) 12/31/12) 12/31/13) 12/31/11) 12/31/12) 12/31/13)
Capital Strength ETF $121,621 $103,140 $167,646 $61,430 $59,498 $49,536
Internet Fund $2,482,993 $1,960,241 $4,864,568 $0 $0 $0
MicroCap Fund $440,181 $169,262 $374,053 $117,235 $79,603 $115,749
ISE Chindia Fund $475,043 $206,662 $219,317 $76,490 $97,245 $35,100
ISE Gas Fund $1,849,355 $1,470,150 $1,786,380 $139,394 $100,098 $11,985
ISE Water Fund $218,046 $243,344 $516,793 $25,829 $19,978 $0
Dividend Leaders Fund $418,946 $1,344,991 $1,602,473 $226,674 $322,632 $269,543
Equal Weighted Fund $273,957 $274,621 $695,038 $65,568 $66,409 $56,300
Ex-Technology Fund $61,487 $88,179 $216,423 $50,938 $58,392 $44,451
Technology Fund $1,455,442 $496,828 $491,007 $114,729 $71,070 $32,509
Community Bank Fund $4,586 $0 $63,071 $45,663 $46,863 $40,775
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[Enlarge/Download Table]
AMOUNT OF MANAGEMENT FEES
(NET OF FEE WAIVERS AND EXPENSE AMOUNT OF FEES WAIVED AND EXPENSES
REIMBURSEMENTS BY FIRST TRUST) REIMBURSED BY FIRST TRUST
----------------------------------------- -----------------------------------------
(FOR THE (FOR THE (FOR THE (FOR THE (FOR THE (FOR THE
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
FUND 12/31/11) 12/31/12) 12/31/13) 12/31/11) 12/31/12) 12/31/13)
Clean Edge(R) Fund $72,075 $3,928 $158,582 $54,545 $63,185 $50,502
Biotech Fund $1,217,147 $924,329 $2,184,017 $43,660 $32,040 $0
S&P REIT Fund $401,557 $1,183,976 $979,339 $130,777 $4,444 $0
US IPO Fund $0 $0 $430,644 $73,773 $76,150 $70,526
Value Line(R) 100 Fund $313,659 $175,074 $164,680 $99,646 $88,774 $81,246
Value Line(R)
Dividend Fund $1,142,685 $1,958,506 $2,962,710 $249,861 $350,127 $391,960
Value Line(R) Equity
Allocation Fund $0 $0 $0 $47,073 $59,245 $59,346
For the Tail Hedge Fund, pursuant to the applicable Investment Management
Agreement between First Trust and the Trust, First Trust will manage the
investment of the Fund's assets and will be responsible for managing the Fund's
business affairs and providing certain clerical, bookkeeping and other
administrative services, and for paying all expenses of the Fund, excluding the
fee payments under the Investment Management Agreement, interest, taxes,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and service fees payable pursuant to a Rule
12b-1 plan, if any, and extraordinary expenses.
Under the Investment Management Agreement, First Trust shall not be liable
for any loss sustained by reason of the purchase, sale or retention of any
security, whether or not such purchase, sale or retention shall have been based
upon the investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been selected with due care and
in good faith, except loss resulting from willful misfeasance, bad faith, or
gross negligence on the part of First Trust in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties. The Investment Management Agreement continues only if
approved annually by the Board of Trustees, including a majority of the
Independent Trustees. The Investment Management Agreement terminates
automatically upon assignment and is terminable at any time without penalty as
to the Funds by the Board of Trustees, including a majority of the Independent
Trustees, or by vote of the holders of a majority of a Fund's outstanding voting
securities on 60 days' written notice to First Trust, or by First Trust on 60
days' written notice to the Funds.
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The following table sets forth the management fees received by First Trust
from the Tail Hedge Fund for the specified periods.
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AMOUNT OF MANAGEMENT FEES
FISCAL PERIOD FISCAL YEAR ENDED
AUGUST 29, 2012 - DECEMBER 31, 2013
FUND DECEMBER 31, 2012
Tail Hedge Fund $4,667 $33,997
Investment Committee. The Investment Committee of First Trust is primarily
responsible for the day-to-day management of the Funds. For all of the Funds,
except the Tail Hedge Fund, there are currently five members of the Investment
Committee, as follows:
[Enlarge/Download Table]
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Daniel J. Lindquist Managing Director Since 2004 Managing Director (July 2012
to present), Senior Vice
President (September 2005 to
July 2012), Vice President
(April 2004 to September
2005), First Trust Advisors
L.P. and First Trust
Portfolios L.P.
Jon C. Erickson Senior Vice President Since 1994 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
David G. McGarel Chief Investment Officer Since 1997 Chief Investment Officer (June
and Managing Director 2012 to present), Managing
Director (July 2012 to
Present); Senior Vice
President (September 2005 to
July 2012), First Trust
Advisors L.P. and First Trust
Portfolios L.P.
Roger F. Testin Senior Vice President Since 2001 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
Stan Ueland Senior Vice President Since 1997 Senior Vice President
(September 2012 to Present),
Vice President (August 2005 to
September 2012), First Trust
Advisors L.P. and First Trust
Portfolios L.P.
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For the Tail Hedge Fund, the Investment Committee consists of the five
members listed above as well as the following two members:
[Enlarge/Download Table]
John Gambla Senior Portfolio Manager Since 2011 Senior Portfolio Manager (July
2011 to Present), First Trust
Advisors L.P. and First Trust
Portfolios L.P.; Co-Chief
Investment Officer (June 2010
to February 2011) and Managing
Director (September 2007 to
February 2011), Nuveen
HydePark Group LLC
Rob A. Guttschow Senior Portfolio Manager Since 2011 Senior Portfolio Manager (July
2011 to Present), First Trust
Advisors L.P. and First Trust
Portfolios L.P.; Co-Chief
Investment Officer (June 2010
to February 2011) and Managing
Director (September 2007 to
February 2011), Nuveen
HydePark Group LLC
Daniel J. Lindquist: Mr. Lindquist is Chairman of the Investment Committee
and presides over Investment Committee meetings. Mr. Lindquist is also
responsible for overseeing the implementation of the Funds' investment
strategies.
Jon C. Erickson: As the head of First Trust's Equity Research Group, Mr.
Erickson is responsible for determining the securities to be purchased and sold
by funds that do not utilize quantitative investment strategies.
David G. McGarel: As First Trust's Chief Investment Officer, Mr. McGarel
consults with the Investment Committee on market conditions and First Trust's
general investment philosophy.
Roger F. Testin: As head of First Trust's Portfolio Management Group, Mr.
Testin is responsible for executing the instructions of the Strategy Research
Group and Equity Research Group in a Fund's portfolio.
Stan Ueland: Mr. Ueland executes the investment strategies of each of the
Funds.
John Gambla: Mr. Gambla is a Senior Portfolio Manager at First Trust.
Rob A. Guttschow: Mr. Guttschow is a Senior Portfolio Manager at First
Trust.
The following table sets forth the dollar range of equity securities
beneficially owned by the members of the investment committee in the Funds as of
December 31, 2013:
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Dollar Range of Equity Securities in a Fund
Daniel J. Lindquist $1-$10,000 of the Community Bank Fund,
$10,001-$50,000 of the Biotech Fund,
$1-$10,000 of the S&P REIT Fund and
$1-$10,000 of the US IPO Fund
Jon C. Erickson None
David G. McGarel $50,001-$100,000 of the Value Line(R) Dividend Fund
Roger F. Testin $1-$10,000 of the Value Line(R) 100 Fund and
$1-$10,000 of the Value Line(R) Dividend Fund
Stan Ueland $10,001-$50,000 of the Internet Fund,
$10,001-$50,000 of the ISE Gas Fund,
$10,001-$50,000 of the Biotech Fund and
$10,001-$50,000 of the Value Line(R) Dividend Fund
John Gambla None
Rob A. Guttschow None
Compensation. As of December 31, 2013, the compensation structure for each
member of the Investment Committee is based upon a fixed salary as well as a
discretionary bonus determined by the management of First Trust. Salaries are
determined by management and are based upon an individual's position and overall
value to the firm. Bonuses are also determined by management and are based upon
an individual's overall contribution to the success of the firm and the
profitability of the firm. Salaries and bonuses for members of the Investment
Committee are not based upon criteria such as performance of the Funds or the
value of assets included in the Funds' portfolios. In addition, Mr. Erickson,
Mr. Lindquist, Mr. McGarel and Mr. Ueland also have an indirect ownership stake
in the firm and will therefore receive their allocable share of
ownership-related distributions.
The Investment Committee manages the investment vehicles (other than the
Funds of the Trust) with the number of accounts and assets, as of the fiscal
year ended December 31, 2013, set forth in the table below:
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ACCOUNTS MANAGED BY INVESTMENT COMMITTEE
[Enlarge/Download Table]
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES
NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS OTHER ACCOUNTS NUMBER OF
INVESTMENT COMMITTEE MEMBER ($ ASSETS) ($ ASSETS) ACCOUNTS ($ ASSETS)
Roger F. Testin 67 ($17,749,121,984) 8 ($138,646,923) 2,411 ($760,225,152)
Jon C. Erickson 67 ($17,749,121,984) 8 ($138,646,923) 2,411 ($760,225,152)
David G. McGarel 67 ($17,749,121,984) 8 ($138,646,923) 2,411 ($760,225,152)
Daniel J. Lindquist 67 ($17,749,121,984) 8 ($138,646,923) 2,411 ($760,225,152)
Stan Ueland 54 ($12,445,868,326) N/A N/A
John Gambla 2 ($8,250,583) 4 ($54,663,923) N/A
Rob A. Guttschow 2 ($8,250,583) 4 ($54,663,923) N/A
Conflicts. None of the accounts managed by the Investment Committee pay an
advisory fee that is based upon the performance of the account. In addition,
First Trust believes that there are no material conflicts of interest that may
arise in connection with the Investment Committee's management of the Funds'
investments and the investments of the other accounts managed by the Investment
Committee. However, because the investment strategy of the Funds and the
investment strategies of many of the other accounts managed by the Investment
Committee are based on fairly mechanical investment processes, the Investment
Committee may recommend that certain clients sell and other clients buy a given
security at the same time. In addition, because the investment strategies of the
Funds and other accounts managed by the Investment Committee generally result in
the clients investing in readily available securities, First Trust believes that
there should not be material conflicts in the allocation of investment
opportunities between the Funds and other accounts managed by the Investment
Committee.
BROKERAGE ALLOCATIONS
First Trust is responsible for decisions to buy and sell securities for
the Funds and for the placement of the Funds' securities business, the
negotiation of the commissions to be paid on brokered transactions, the prices
for principal trades in securities, and the allocation of portfolio brokerage
and principal business. It is the policy of First Trust to seek the best
execution at the best security price available with respect to each transaction,
and with respect to brokered transactions in light of the overall quality of
brokerage and research services provided to First Trust and its clients. The
best price to a Fund means the best net price without regard to the mix between
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purchase or sale price and commission, if any. Purchases may be made from
underwriters, dealers, and, on occasion, the issuers. Commissions will be paid
on a Fund's Futures and options transactions, if any. The purchase price of
portfolio securities purchased from an underwriter or dealer may include
underwriting commissions and dealer spreads. The Funds may pay mark-ups on
principal transactions. In selecting broker/dealers and in negotiating
commissions, First Trust considers, among other things, the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. Fund portfolio transactions may be effected with broker/dealers who
have assisted investors in the purchase of shares.
Section 28(e) of the 1934 Act, permits an investment advisor, under
certain circumstances, to cause an account to pay a broker or dealer who
supplies brokerage and research services a commission for effecting a
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting the transaction. Brokerage and research services
include (i) furnishing advice as to the value of securities, the advisability of
investing, purchasing or selling securities, and the availability of securities
or purchasers or sellers of securities; (ii) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). Such brokerage and research services are
often referred to as "soft dollars." First Trust has advised the Board of
Trustees that it does not currently intend to use soft dollars.
Notwithstanding the foregoing, in selecting brokers, First Trust may in
the future consider investment and market information and other research, such
as economic, securities and performance measurement research, provided by such
brokers, and the quality and reliability of brokerage services, including
execution capability, performance, and financial responsibility. Accordingly,
the commissions charged by any such broker may be greater than the amount
another firm might charge if First Trust determines in good faith that the
amount of such commissions is reasonable in relation to the value of the
research information and brokerage services provided by such broker to First
Trust or the Trust. In addition, First Trust must determine that the research
information received in this manner provides the Funds with benefits by
supplementing the research otherwise available to the Funds. The Investment
Management Agreement provides that such higher commissions will not be paid by
the Funds unless First Trust determines in good faith that the amount is
reasonable in relation to the services provided. The investment advisory fees
paid by the Funds to First Trust under the Investment Management Agreement would
not be reduced as a result of receipt by First Trust of research services.
First Trust places portfolio transactions for other advisory accounts
advised by it, and research services furnished by firms through which the Funds
effect their securities transactions may be used by First Trust in servicing all
of its accounts; not all of such services may be used by First Trust in
connection with the Funds. First Trust believes it is not possible to measure
separately the benefits from research services to each of the accounts
(including the Funds) advised by it. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions in
excess of those charged by another broker paid by each account for brokerage and
research services will vary. However, First Trust believes such costs to the
Funds will not be disproportionate to the benefits received by the Funds on a
continuing basis. First Trust seeks to allocate portfolio transactions equitably
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whenever concurrent decisions are made to purchase or sell securities by the
Funds and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Funds.
In making such allocations between the Funds and other advisory accounts, the
main factors considered by First Trust are the respective investment objectives,
the relative size of portfolio holding of the same or comparable securities, the
availability of cash for investment and the size of investment commitments
generally held.
BROKERAGE COMMISSIONS
The following table sets forth the aggregate amount of brokerage
commissions paid by each Fund for the specified periods.
[Enlarge/Download Table]
AGGREGATE AMOUNT OF BROKERAGE COMMISSIONS
-----------------------------------------
(FOR THE PERIOD ENDED (FOR THE PERIOD ENDED (FOR THE PERIOD ENDED
FUND DECEMBER 31, 2011) DECEMBER 31, 2012) DECEMBER 31, 2013)
Capital Strength ETF $27,379 $16,214 $26,859
Tail Hedge Fund N/A $1,638 $7,661
Internet Fund $103,003 $131,347 $144,842
MicroCap Fund $134,071 $66,495 $96,826
ISE Chindia Fund $40,518 $30,832 $25,451
ISE Gas Fund $162,159 $228,213 $361,402
ISE Water Fund $25,958 $29,464 $54,570
Dividend Leaders Fund $31,872 $97,163 $103,650
Equal Weighted Fund $18,431 $20,665 $21,768
Ex-Technology Fund $8,346 $10,000 $7,720
Technology Fund $60,522 $30,325 $16,067
Community Bank Fund $5,452 $2,227 $6,401
Clean Edge(R) Fund $16,693 $13,960 $35,409
Biotech Fund $170,825 $127,391 $437,053
S&P REIT Fund $20,226 $22,051 $26,860
US IPO Fund $6,562 $7,100 $26,771
Value Line(R) 100 Fund $169,912 $122,765 $169,619
Value Line(R) Dividend Fund $76,561 $128,949 $184,444
Value Line(R) Equity Allocation $8,672 $8,279 $5,400
Fund
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During the last fiscal year, the Capital Strength ETF and Tail Hedge Fund
acquired securities of Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan
Chase & Co. and Morgan Stanley Smith Barney LLC, each a regular broker or dealer
of the Funds as defined in Rule 10b-1 under the 1940 Act. As of December 31,
2013, the Capital Strength ETF's investment in Citigroup Inc., Goldman Sachs
Group, Inc., JP Morgan Chase & Co. and Morgan Stanley Smith Barney LLC
represented 0.96%, 0.45%, 1.33% and 0.26% of the Fund's net assets,
respectively.
The Capital Strength ETF experienced an increase in the amount of
brokerage commissions paid for the fiscal year ended December 31, 2013 as a
result of the change to its Index, which required its portfolio to be modified
accordingly. The inception date for the Tail Hedge Fund was August 29, 2012 and,
therefore, the increase in the amount of brokerage commissions paid for the
fiscal year ended December 31, 2013, as compared to the amount paid for the
fiscal year ended December 31, 2012, reflected the shortened period of trading
in 2012. The ISE Gas Fund, the ISE Water Fund, the Community Bank Fund and the
Biotech Fund experienced a significant increase in the amount of brokerage
commissions paid for the fiscal year ended December 31, 2013 due to increases in
the net assets of those Funds.
Administrator. The Bank of New York Mellon Corporation ("BNYM") serves as
Administrator for the Funds. Its principal address is 101 Barclay Street, New
York, New York 10286.
BNYM serves as Administrator for the Trust pursuant to a Fund
Administration and Accounting Agreement (the "Administration Agreement"). Under
such agreement, BNYM is obligated on a continuous basis, to provide such
administrative services as the Board of Trustees reasonably deems necessary for
the proper administration of the Trust and the Funds. BNYM will generally assist
in all aspects of the Trust's and the Funds' operations; supply and maintain
office facilities (which may be in BNYM's own offices), statistical and research
data, data processing services, clerical, accounting, bookkeeping and record
keeping services (including, without limitation, the maintenance of such books
and records as are required under the 1940 Act and the rules thereunder, except
as maintained by other agency agents), internal auditing, executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; and provide monitoring reports and assistance
regarding compliance with federal and state securities laws.
Pursuant to the Administration Agreement, the Trust on behalf of the Funds
has agreed to indemnify the Administrator for certain liabilities, including
certain liabilities arising under the federal securities laws, unless such loss
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or liability results from negligence or willful misconduct in the performance of
its duties.
Pursuant to the Administration Agreement between BNYM and the Trust, the
Funds have agreed to pay such compensation as is mutually agreed from time to
time and such out-of-pocket expenses as incurred by BNYM in the performance of
its duties. This fee is subject to reduction for assets over $1 billion. The
following table sets forth the amounts paid by each Fund to BNYM under the
Administration Agreement.
[Enlarge/Download Table]
FOR THE PERIOD ENDED FOR THE PERIOD ENDED FOR THE PERIOD ENDED
FUND DECEMBER 31, 2011 DECEMBER 31, 2012 DECEMBER 31, 2013
Capital Strength ETF $20,000 $18,322 $23,464
Tail Hedge Fund N/A N/A N/A
Internet Fund $311,973 $247,055 $609,699
MicroCap Fund $59,102 $29,825 $53,917
ISE Chindia Fund $112,860 $97,438 $14,595
ISE Gas Fund $250,080 $198,544 $226,398
ISE Water Fund $32,040 $34,767 $66,221
Dividend Leaders Fund $109,854 $280,808 $315,526
Equal Weighted Fund $45,255 $50,563 $95,377
Ex-Technology Fund $15,863 $23,600 $34,182
Technology Fund $205,901 $73,045 $67,023
Community Bank Fund $8,506 $8,072 $15,665
Clean Edge(R) Fund $21,057 $19,495 $25,951
Biotech Fund $158,969 $121,209 $274,583
S&P REIT Fund $91,083 $200,824 $166,422
US IPO Fund $11,160 $11,800 $65,233
Value Line(R) 100 Fund $43,726 $30,284 $26,326
Value Line(R) Dividend Fund $142,237 $234,352 $339,612
Value Line(R) Equity $6,217 $5,779 $5,340
Allocation Fund
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT,
INDEX PROVIDERS AND EXCHANGES
Custodian, Transfer Agent and Accounting Agent. BNYM, as custodian for the
Funds pursuant to a Custody Agreement, holds each Fund's assets which may be
held through U.S. and non-U.S. sub-custodians and depositories. BNYM, also
serves as transfer agent of the Funds pursuant to a Transfer Agency and Service
Agreement. As the Funds' accounting agent, BNYM calculates the net asset value
of shares and calculates net income and realized capital gains or losses. BNYM
may be reimbursed by the Funds for its out-of-pocket expenses.
Distributor. First Trust Portfolios L.P., an affiliate of First Trust, is
the distributor ("FTP" or the "Distributor") and principal underwriter of the
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shares of the Funds. Its principal address is 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187. The Distributor has entered into a Distribution
Agreement with the Trust pursuant to which it distributes Fund shares. Shares
are continuously offered for sale by the Funds through the Distributor only in
Creation Unit Aggregations, as described below under the heading "Creation and
Redemption of Creation Unit Aggregations."
First Trust may, from time to time and from its own resources, pay, defray
or absorb costs relating to distribution, including payments out of its own
resources to the Distributor, or to otherwise promote the sale of shares. First
Trust's available resources to make these payments include profits from advisory
fees received from the Funds. The services First Trust may pay for include, but
are not limited to, advertising and attaining access to certain conferences and
seminars, as well as being presented with the opportunity to address investors
and industry professionals through speeches and written marketing materials.
For the fiscal years ended December 31, 2011, 2012 and 2013, there were no
underwriting commissions with respect to the sale of Fund shares and First Trust
Portfolios L.P. did not receive compensation on redemptions for the Funds for
that period.
12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act (the "Plan") pursuant to which the Funds may reimburse
the Distributor up to a maximum annual rate of 0.25% of their average daily net
assets.
Under the Plan and as required by Rule 12b-1, the Trustees will receive
and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made. With the exception of the Distributor and its
affiliates, no "interested person" of the Trust (as that term is defined in the
1940 Act) and no Trustee of the Trust has a direct or indirect financial
interest in the operation of the Plan or any related agreement.
No fee is currently paid by a Fund under the Plan and pursuant to a
contractual agreement, the Funds will not pay 12b-1 fees any time before April
30, 2015.
Aggregations. Fund shares in less than Creation Unit Aggregations are not
distributed by the Distributor. The Distributor will deliver the Prospectus and,
upon request, this SAI to persons purchasing Creation Unit Aggregations and will
maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor is a broker-dealer registered under the 1934
Act and a member of the Financial Industry Regulatory Authority ("FINRA").
The Distribution Agreement provides that it may be terminated at any time,
without the payment of any penalty, on at least 60 days' written notice by the
Trust to the Distributor (i) by vote of a majority of the Independent Trustees
or (ii) by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Funds. The Distribution Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
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The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations
of Fund shares. Such Soliciting Dealers may also be Participating Parties (as
defined in "Procedures for Creation of Creation Unit Aggregations" below) and
DTC Participants (as defined in "DTC Acts as Securities Depository for Fund
Shares" below).
Index Providers. The respective Indices that each respective Fund seeks to
track are compiled by the Index Providers as set forth below.
[Download Table]
FUND INDEX PROVIDER
Capital Strength ETF The NASDAQ OMX Group, Inc.
Tail Hedge Fund Chicago Board Options Exchange, Incorporated
Internet Fund CME Group Index Services LLC
MicroCap Fund CME Group Index Services LLC
ISE Chindia Fund International Securities Exchange, LLC
ISE Gas Fund International Securities Exchange, LLC
ISE Water Fund International Securities Exchange, LLC
Dividend Leaders Fund Morningstar, Inc.
Equal Weighted Fund The NASDAQ OMX Group, Inc.
Ex-Technology Fund The NASDAQ OMX Group, Inc.
Technology Fund The NASDAQ OMX Group, Inc.
Community Bank Fund The NASDAQ OMX Group, Inc.
Clean Edge(R) Fund The NASDAQ OMX Group, Inc.
Biotech Fund NYSE Euronext
S&P REIT Fund Standard & Poor's
US IPO Fund IPOX(R) Schuster LLC
Value Line(R) 100 Fund Value Line(R) Publishing, Inc.
Value Line(R) Dividend Fund Value Line(R) Publishing, Inc.
Value Line(R) Equity Allocation Fund Value Line(R) Publishing, Inc.
------------------------
(1) Prior to June 4, 2013, the Capital Strength ETF's index provider was
Credit Suisse Securities (USA) LLC
The Index Providers are not affiliated with the Funds or First Trust. Each
Fund is entitled to use the applicable Index pursuant to a sublicensing
arrangement with First Trust, which in turn has a Product License Agreement with
each Index Provider.
With respect to the Biotech Fund, the Value Line(R) 100 Fund, the Value
Line(R) Dividend Fund and the Value Line(R) Equity Allocation Fund, NYSE Arca
serves as the calculation agent for these Funds. As the calculation agent, NYSE
Arca will be responsible for the management of the day-to-day operations of
these respective Indices, including calculating the value of the Indices every
15 seconds, widely disseminating each such Index value every 15 seconds through
NYSE Arca's data publication network and tracking corporate actions resulting in
adjustments to such Index.
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For the Capital Strength ETF, the Equal Weighted Fund, the Ex-Technology
Fund, the Technology Fund and the Clean Edge(R) Fund, First Trust has entered
into an agreement with NASDAQ(R) pursuant to which NASDAQ(R) or its designee
will serve as the calculation agent for the applicable Indices. As the
calculation agent, NASDAQ(R) or its designee will be responsible for calculating
and disseminating the intra-day portfolio values for such Funds' shares.
Exchanges. Besides serving as the index calculation agent for certain of
the Funds as described above, the only other relationship that NYSE Arca has
with First Trust or the Distributor in connection with the Tail Hedge Fund, the
Internet Fund, the MicroCap Fund, the ISE Chindia Fund, the ISE Gas Fund, the
ISE Water Fund, the Dividend Leaders Fund, the Biotech Fund, the S&P REIT Fund,
the US IPO Fund, Value Line(R) 100 Fund, the Value Line(R) Dividend Fund and the
Value Line(R) Equity Allocation Fund (collectively, the "NYSE Arca Listed
Funds") is that NYSE Arca lists the shares of the NYSE Arca Listed Funds
pursuant to its Listing Agreement with the Trust. NYSE Arca is not responsible
for and has not participated in the determination of pricing or the timing of
the issuance or sale of the shares of the NYSE Arca Listed Funds or in the
determination or calculation of the net asset value of such Funds. NYSE Arca has
no obligation or liability in connection with the administration, marketing or
trading of the NYSE Arca Listed Funds.
NASDAQ(R) serves as the Index Provider and the index calculation agent for
the Indices related to the Capital Strength ETF, the Equal Weighted Fund, the
Technology Fund, the Ex-Technology Fund, the Community Bank Fund and the Clean
Edge(R) Fund (together, the "NASDAQ(R) Listed Funds"). The only other
relationship that NASDAQ(R) has with First Trust or the Distributor in
connection with the NASDAQ(R) Listed Funds is that NASDAQ(R) lists the shares of
the NASDAQ(R) Listed Funds pursuant to its Listing Agreement with the Trust.
NASDAQ(R) is not responsible for and has not participated in the determination
of pricing or the timing of the issuance or sale of the shares of the NASDAQ(R)
Listed Funds or in the determination or calculation of the net asset value of
such Funds. NASDAQ(R) has no obligation or liability in connection with the
administration, marketing or trading of the NASDAQ(R) Listed Funds.
ADDITIONAL INFORMATION
Book Entry Only System. The following information supplements and should
be read in conjunction with the Prospectus.
DTC Acts as Securities Depository for Fund Shares. Shares of the Funds are
represented by securities registered in the name of The Depository Trust Company
("DTC") or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of
its participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
or certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
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a number of its DTC Participants and by the New York Stock Exchange (the "NYSE")
and FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
"Indirect Participants").
Beneficial ownership of shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase and sale of
shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is effected as follows. Pursuant to a letter agreement between
DTC and the Trust, DTC is required to make available to the Trust upon request
and for a fee to be charged to the Trust a listing of the shares of the Funds
held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participants a fair
and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Fund distributions shall be made to DTC or its nominee, as the registered
holder of all Fund shares. DTC or its nominee, upon receipt of any such
distributions, shall immediately credit DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in shares of
the Funds as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
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DTC may decide to discontinue providing its service with respect to shares
at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
Policy Regarding Investment in Other Investment Companies. The Funds,
except the Tail Hedge Fund, will not rely on Sections 12(d)(1)(F) or 12(d)(1)(G)
of the 1940 Act to invest in other investment companies.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by each Fund are voted consistently with the best
interests of the Funds.
The Board has delegated to First Trust the proxy voting responsibilities
for the Funds and has directed First Trust to vote proxies consistent with the
Funds' best interests. First Trust has engaged the services of ISS Governance
Services, a division of RiskMetrics Group, Inc. ("ISS"), to make recommendations
to First Trust on the voting of proxies relating to securities held by the
Funds. If First Trust manages the assets of a company or its pension plan and
any of First Trust's clients hold any securities of that company, First Trust
will vote proxies relating to such company's securities in accordance with the
ISS recommendations to avoid any conflict of interest. While these guidelines
are not intended to be all-inclusive, they do provide guidance on First Trust's
general voting policies.
First Trust has adopted the ISS Proxy Voting Guidelines. While these
guidelines are not intended to be all-inclusive, they do provide guidance on
First Trust's general voting policies. The ISS Proxy Voting Guidelines are
attached hereto as Exhibit B.
Information regarding how the Funds voted proxies (if any) relating to
portfolio securities during the most recent 12-month period ended June 30, is
available upon request and without charge on the Funds' website at
http://www.ftportfolios.com; and by calling (800) 621-1675 or by accessing the
SEC's website at http://www.sec.gov.
Quarterly Portfolio Schedule. The Trust is required to disclose, after its
first and third fiscal quarters, the complete schedule of the Funds' portfolio
holdings with the SEC on Form N-Q. Forms N-Q for the Trust are available on the
SEC's website at http://www.sec.gov. The Funds' Forms N-Q may also be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. and
information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The Trust's Forms N-Q are available without charge, upon
request, by calling (800) 621-1675 or by writing to First Trust Portfolios L.P.,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Policy Regarding Disclosure of Portfolio Holdings. The Trust has adopted a
policy regarding the disclosure of information about each Fund's portfolio
holdings. The Board of Trustees must approve all material amendments to this
policy. Each Fund's portfolio holdings are publicly disseminated each day the
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Fund is open for business through financial reporting and news services,
including publicly accessible Internet websites. In addition, a basket
composition file, which includes the security names and share quantities to
deliver in exchange for Fund shares, together with estimates and actual cash
components, is publicly disseminated each day the NYSE is open for trading via
the National Securities Clearing Corporation ("NSCC"). The basket represents one
Creation Unit of a Fund. Each Fund's portfolio holdings are also available on
the Funds' website at http://www.ftportfolios.com. The Trust, First Trust, FTP
and BNYM will not disseminate non-public information concerning the Trust.
Codes of Ethics. In order to mitigate the possibility that the Funds will
be adversely affected by personal trading, the Trust, First Trust and the
Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These
Codes of Ethics contain policies restricting securities trading in personal
accounts of the officers, Trustees and others who normally come into possession
of information on portfolio transactions. Personnel subject to the Codes of
Ethics may invest in securities that may be purchased or held by the Funds;
however, the Codes of Ethics require that each transaction in such securities be
reviewed by the CCO or his or her designee. These Codes of Ethics are on public
file with, and are available from, the SEC.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation. The Trust issues and sells shares of the Funds only in Creation
Unit Aggregations on a continuous basis through the Distributor, without a sales
load, at their net asset values next determined after receipt, on any Business
Day (as defined below), of an order in proper form.
A "Business Day" is any day on which the NYSE is open for business. As of
the date of this SAI, the NYSE observes the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash. The consideration
for purchase of Creation Unit Aggregations of a Fund may consist of (i) cash in
lieu of all or a portion of the Deposit Securities, as defined below, and/or
(ii) a designated portfolio of equity securities determined by First Trust the
"Deposit Securities" per each Creation Unit Aggregation constituting a
substantial replication of the stocks included in the underlying index and
generally an amount of cash the "Cash Component" computed as described below.
Together, the Deposit Securities and the Cash Component (including the cash in
lieu amount) constitute the "Fund Deposit," which represents the minimum initial
and subsequent investment amount for a Creation Unit Aggregation of a Fund.
The Cash Component is sometimes also referred to as the Balancing Amount.
The Cash Component serves the function of compensating for any differences
between the net asset value per Creation Unit Aggregation and the Deposit Amount
(as defined below). The Cash Component is an amount equal to the difference
between the net asset value of Fund shares (per Creation Unit Aggregation) and
the "Deposit Amount"--an amount equal to the market value of the Deposit
Securities and/or cash in lieu of all or a portion of the Deposit Securities. If
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the Cash Component is a positive number (i.e., the net asset value per Creation
Unit Aggregation exceeds the Deposit Amount), the creator will deliver the Cash
Component. If the Cash Component is a negative number (i.e., the net asset value
per Creation Unit Aggregation is less than the Deposit Amount), the creator will
receive the Cash Component.
The Custodian, through the NSCC (discussed below), makes available on each
Business Day, prior to the opening of business of the NYSE (currently 9:30 a.m.,
Eastern Time), the list of the names and the required number of shares of each
Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) for a Fund.
Such Fund Deposit is applicable, subject to any adjustments as described
below, in order to effect creations of Creation Unit Aggregations of a Fund
until such time as the next-announced composition of the Deposit Securities is
made available.
The identity and number of shares of the Deposit Securities required for a
Fund Deposit for a Fund changes as rebalancing adjustments and corporate action
events are reflected within a Fund from time to time by First Trust with a view
to the investment objective of each Fund. The composition of the Deposit
Securities may also change in response to adjustments to the weighting or
composition of the component stocks of the underlying index. In addition, the
Trust reserves the right to permit or require the substitution of an amount of
cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to
replace any Deposit Security that may not be available, may not be available in
sufficient quantity for delivery or that may not be eligible for transfer
through the systems of DTC or the Clearing Process (discussed below), or which
might not be eligible for trading by an Authorized Participant ("AP") or the
investor for which it is acting or other relevant reason. Brokerage commissions
incurred in connection with the acquisition of Deposit Securities not eligible
for transfer through the systems of DTC and hence not eligible for transfer
through the Clearing Process (discussed below) will be at the expense of a Fund
and will affect the value of all shares; but First Trust, subject to the
approval of the Board of Trustees, may adjust the transaction fee within the
parameters described above to protect ongoing shareholders. The adjustments
described above will reflect changes known to First Trust on the date of
announcement to be in effect by the time of delivery of the Fund Deposit, in the
composition of the underlying index or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting
the current Deposit Securities of a Fund Deposit, the Custodian, through the
NSCC, also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding
Creation Unit Aggregation of a Fund.
Procedures for Creation of Creation Unit Aggregations. In order to be
eligible to place orders with the Distributor and to create a Creation Unit
Aggregation of a Fund, an entity must be (i) a "Participating Party," i.e., a
broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the "Clearing Process"), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
the Book Entry Only System section), and, in each case, must have executed an
agreement with the Distributor and transfer agent, with respect to creations and
redemptions of Creation Unit Aggregations ("Participant Agreement") (discussed
-66-
below). A Participating Party and DTC Participant are collectively referred to
as an "AP." Investors should contact the Distributor for the names of APs that
have signed a Participant Agreement. All Fund shares, however created, will be
entered on the records of DTC in the name of Cede & Co. for the account of a DTC
Participant.
All orders to create Creation Unit Aggregations, whether through the
Clearing Process (through a Participating Party) or outside the Clearing Process
(through a DTC Participant), must be received by the Distributor no later than
the closing time of the regular trading session on the NYSE ("Closing Time")
(ordinarily 4:00 p.m., Eastern Time) in each case on the date such order is
placed in order for creation of Creation Unit Aggregations to be effected based
on the net asset value of shares of the Funds as next determined on such date
after receipt of the order in proper form. In the case of custom orders, the
order must be received by the Distributor no later than 3:00 p.m. Eastern Time
on the trade date. A custom order may be placed by an AP in the event that the
Trust permits or requires the substitution of an amount of cash to be added to
the Cash Component to replace any Deposit Security which may not be available in
sufficient quantity for delivery or which may not be eligible for trading by
such AP or the investor for which it is acting or other relevant reason. The
date on which an order to create Creation Unit Aggregations (or an order to
redeem Creation Unit Aggregations, as discussed below) is placed is referred to
as the "Transmittal Date." Orders must be transmitted by an AP by telephone or
other transmission method acceptable to the Distributor pursuant to procedures
set forth in the Participant Agreement, as described below (see the Placement of
Creation Orders Using Clearing Process and the Placement of Creation Orders
Outside Clearing Process sections). Severe economic or market disruptions or
changes, or telephone or other communication failure may impede the ability to
reach the Distributor or an AP.
All orders from investors who are not APs to create Creation Unit
Aggregations shall be placed with an AP in the form required by such AP. In
addition, the AP may request the investor to make certain representations or
enter into agreements with respect to the order, e.g., to provide for payments
of cash, when required. Investors should be aware that their particular broker
may not have executed a Participant Agreement and that, therefore, orders to
create Creation Unit Aggregations of a Fund have to be placed by the investor's
broker through an AP that has executed a Participant Agreement. In such cases
there may be additional charges to such investor. At any given time, there may
be only a limited number of broker-dealers that have executed a Participant
Agreement. Those placing orders for Creation Unit Aggregations through the
Clearing Process should afford sufficient time in order to permit proper
submission of the order to the Distributor prior to the Closing Time on the
Transmittal Date. Orders for Creation Unit Aggregations that are effected
outside the Clearing Process are likely to require transmittal by the DTC
Participant earlier on the Transmittal Date than orders effected using the
Clearing Process. Those persons placing orders outside the Clearing Process
should ascertain the deadlines applicable to DTC and the Federal Reserve Bank
wire system by contacting the operations department of the broker or depository
institution effectuating such transfer of Deposit Securities and Cash Component.
Placement of Creation Orders Using Clearing Process. The Clearing Process
is the process of creating or redeeming Creation Unit Aggregations through the
Continuous Net Settlement System of the NSCC. Fund Deposits made through the
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Clearing Process must be delivered through a Participating Party that has
executed a Participant Agreement. The Participant Agreement authorizes the
Distributor to transmit through the Custodian to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Creation Unit
Aggregations through the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside Clearing Process. Fund Deposits made
outside the Clearing Process must be delivered through a DTC Participant that
has executed a Participant Agreement pre-approved by First Trust and the
Distributor. A DTC Participant who wishes to place an order creating Creation
Unit Aggregations to be effected outside the Clearing Process does not need to
be a Participating Party, but such orders must state that the DTC Participant is
not using the Clearing Process and that the creation of Creation Unit
Aggregations will instead be effected through a transfer of securities and cash
directly through DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the
account of a Fund by no later than 11:00 a.m., Eastern Time, of the next
Business Day immediately following the Transmittal Date.
All questions as to the number of Deposit Securities to be delivered, and
the validity, form and eligibility (including time of receipt) for the deposit
of any tendered securities, will be determined by the Trust, whose determination
shall be final and binding. The amount of cash equal to the Cash Component must
be transferred directly to the Custodian through the Federal Reserve Bank wire
transfer system in a timely manner so as to be received by the Custodian no
later than 2:00 p.m., Eastern Time, on the next Business Day immediately
following such Transmittal Date. An order to create Creation Unit Aggregations
outside the Clearing Process is deemed received by the Distributor on the
Transmittal Date if (i) such order is received by the Distributor not later than
the Closing Time on such Transmittal Date; and (ii) all other procedures set
forth in the Participant Agreement are properly followed. However, if the
Custodian does not receive both the required Deposit Securities and the Cash
Component by 11:00 a.m. and 2:00 p.m., respectively on the next Business Day
immediately following the Transmittal Date, such order will be canceled. Upon
written notice to the Distributor, such canceled order may be resubmitted the
following Business Day using a Fund Deposit as newly constituted in order to
reflect the then current Deposit Securities and Cash Component. The delivery of
Creation Unit Aggregations so created will occur no later than the third (3rd)
Business Day following the day on which the purchase order is deemed received by
the Distributor.
Additional transaction fees may be imposed with respect to transactions
effected outside the Clearing Process (through a DTC Participant) and in the
limited circumstances in which any cash can be used in lieu of Deposit
Securities to create Creation Units. (See "Creation Transaction Fee" section
below.)
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Creation Unit Aggregations may be created in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the net asset value of the Fund shares on the date the order is placed in
proper form since, in addition to available Deposit Securities, cash must be
deposited in an amount equal to the sum of (i) the Cash Component, plus (ii)
115% of the market value of the undelivered Deposit Securities (the "Additional
Cash Deposit"). The order shall be deemed to be received on the Business Day on
which the order is placed provided that the order is placed in proper form prior
to 4:00 p.m., Eastern Time, on such date, and federal funds in the appropriate
amount are deposited with the Custodian by 11:00 a.m., Eastern Time, the
following Business Day. If the order is not placed in proper form by 4:00 p.m.
or federal funds in the appropriate amount are not received by 11:00 a.m. the
next Business Day, then the order may be deemed to be canceled and the AP shall
be liable to the Funds for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust, pending
delivery of the missing Deposit Securities to the extent necessary to maintain
the Additional Cash Deposit with the Trust in an amount at least equal to 115%
of the daily marked-to-market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
Time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a marked-to-market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. APs will be liable to the Trust and the Funds
for the costs incurred by the Trust in connection with any such purchases. These
costs will be deemed to include the amount by which the actual purchase price of
the Deposit Securities exceeds the market value of such Deposit Securities on
the day the purchase order was deemed received by the Distributor plus the
brokerage and related transaction costs associated with such purchases. The
Trust will return any unused portion of the Additional Cash Deposit once all of
the missing Deposit Securities have been properly received by the Custodian or
purchased by the Trust and deposited into the Trust. In addition, a transaction
fee, as listed below, will be charged in all cases. The delivery of Creation
Unit Aggregations so created will occur no later than the third Business Day
following the day on which the purchase order is deemed received by the
Distributor.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves
the absolute right to reject a creation order transmitted to it by the
Distributor with respect to a Fund if: (i) the order is not in proper form; (ii)
the investor(s), upon obtaining the Fund shares ordered, would own 80% or more
of the currently outstanding shares of the Funds; (iii) the Deposit Securities
delivered are not as disseminated for that date by the Custodian, as described
above; (iv) acceptance of the Deposit Securities would have certain adverse tax
consequences to the Fund; (v) acceptance of the Fund Deposit would, in the
opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would
otherwise, in the discretion of the Trust or First Trust, have an adverse effect
on the Fund or the rights of Beneficial Owners; or (vii) circumstances outside
the control of the Trust, the Custodian, the Distributor and First Trust make it
for all practical purposes impossible to process creation orders. Examples of
such circumstances include acts of God; public service or utility problems such
as fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, First Trust, the Distributor, DTC, NSCC, the
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Custodian or sub-custodian or any other participant in the creation process, and
similar extraordinary events. The Distributor shall notify a prospective creator
of a Creation Unit and/or the AP acting on behalf of such prospective creator of
its rejection of the order of such person. The Trust, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall any of them incur any liability for the failure to give any such
notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility, and acceptance for deposit of
any securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
Creation Transaction Fee. Purchasers of Creation Units will be required to
pay a standard creation transaction fee (the "Creation Transaction Fee"),
described below, payable to BNYM regardless of the number of Creation Units. An
additional variable fee of up to three times the Creation Transaction Fee may be
charged to approximate additional expenses incurred by a Fund with respect to
transactions effected outside of the Clearing Process (i.e., through a DTC
Participant) or to the extent that cash is used in lieu of securities to
purchase Creation Units. Investors are responsible for the costs of transferring
the securities constituting the Deposit Securities to the account of the Trust.
The standard creation transaction fee for each of the Funds, except the
Tail Hedge Fund, is based on the number of different securities in a Creation
Unit according to the fee schedule set forth below:
NUMBER OF SECURITIES CREATION
IN A CREATION UNIT TRANSACTION FEE
1-100 $500
101-200 $1,000
201-300 $1,500
301-400 $2,000
401-500 $2,500
501-600 $3,000
601-700 $3,500
The standard creation transaction fee for the Tail Hedge Fund is currently
$2,500.
Redemption of Fund Shares In Creation Unit Aggregations. Fund shares may
be redeemed only in Creation Unit Aggregations at their net asset value next
determined after receipt of a redemption request in proper form by a Fund
through the Transfer Agent and only on a Business Day. A Fund will not redeem
shares in amounts less than Creation Unit Aggregations. Beneficial Owners must
accumulate enough shares in the secondary market to constitute a Creation Unit
Aggregation in order to have such shares redeemed by the Trust. There can be no
assurance, however, that there will be sufficient liquidity in the public
trading market at any time to permit assembly of a Creation Unit Aggregation.
-70-
Investors should expect to incur brokerage and other costs in connection with
assembling a sufficient number of Fund shares to constitute a redeemable
Creation Unit Aggregation.
With respect to the Funds, the Custodian, through the NSCC, makes
available prior to the opening of business on the NYSE (currently 9:30 a.m.,
Eastern Time) on each Business Day, the identity of the securities ("Fund
Securities") that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as described below)
on that day. Fund Securities received on redemption may not be identical to
Deposit Securities that are applicable to creations of Creation Unit
Aggregations.
Unless cash redemptions are available or specified for a Fund, the
redemption proceeds for a Creation Unit Aggregation generally consist of Fund
Securities--as announced on the Business Day of the request for redemption
received in proper form--plus or minus cash in an amount equal to the difference
between the net asset value of the Fund shares being redeemed, as next
determined after a receipt of a request in proper form, and the value of the
Fund Securities (the "Cash Redemption Amount"), less a redemption transaction
fee as listed below. In the event that the Fund Securities have a value greater
than the net asset value of the Fund shares, a compensating cash payment equal
to the difference plus the applicable redemption transaction fee is required to
be made by or through an AP by the redeeming shareholder.
The right of redemption may be suspended or the date of payment postponed
(i) for any period during which the NYSE is closed (other than customary weekend
and holiday closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency exists
as a result of which disposal of the shares of a Fund or determination of the
Fund's net asset value is not reasonably practicable; or (iv) in such other
circumstances as are permitted by the SEC.
Redemption Transaction Fee. A redemption transaction fee (the "Redemption
Transaction Fee") is imposed to offset transfer and other transaction costs that
may be incurred by a Fund. An additional variable fee of up to three times the
Redemption Transaction Fee may be charged to approximate additional expenses
incurred by a Fund with respect to redemptions effected outside of the Clearing
Process or to the extent that redemptions are for cash. A Fund reserves the
right to effect redemptions in cash. A shareholder may request a cash redemption
in lieu of securities; however, a Fund may, in its discretion, reject any such
request. Investors will also bear the costs of transferring the Fund Securities
from the Trust to their account or on their order. Investors who use the
services of a broker or other such intermediary in addition to an AP to effect a
redemption of a Creation Unit Aggregation may be charged an additional fee for
such services.
The standard redemption transaction fee for each of the Funds, except the
Tail Hedge Fund, is based on the number of different securities in a Creation
Unit according to the fee schedule set forth below:
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NUMBER OF SECURITIES REDEMPTION
IN A CREATION UNIT TRANSACTION FEE
1-100 $500
101-200 $1,000
201-300 $1,500
301-400 $2,000
401-500 $2,500
501-600 $3,000
601-700 $3,500
The standard redemption transaction fee for the Tail Hedge Fund is
currently $2,500.
Placement of Redemption Orders Using Clearing Process. Orders to redeem
Creation Unit Aggregations through the Clearing Process must be delivered
through a Participating Party that has executed the Participant Agreement. An
order to redeem Creation Unit Aggregations using the Clearing Process is deemed
received by the Trust on the Transmittal Date if (i) such order is received by
the Transfer Agent not later than 4:00 p.m., Eastern Time, on such Transmittal
Date, and (ii) all other procedures set forth in the Participant Agreement are
properly followed; such order will be effected based on the net asset value of a
Fund as next determined. An order to redeem Creation Unit Aggregations using the
Clearing Process made in proper form but received by the Trust after 4:00 p.m.,
Eastern Time, will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the net asset value next
determined on such next Business Day. The requisite Fund Securities and the Cash
Redemption Amount will be transferred by the third NSCC Business Day following
the date on which such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing Process. Orders to redeem
Creation Unit Aggregations outside the Clearing Process must be delivered
through a DTC Participant that has executed the Participant Agreement. A DTC
Participant who wishes to place an order for redemption of Creation Unit
Aggregations to be effected outside the Clearing Process does not need to be a
Participating Party, but such orders must state that the DTC Participant is not
using the Clearing Process and that redemption of Creation Unit Aggregations
will instead be effected through transfer of Fund shares directly through DTC.
An order to redeem Creation Unit Aggregations outside the Clearing Process is
deemed received by the Trust on the Transmittal Date if (i) such order is
received by the Transfer Agent not later than 4:00 p.m., Eastern Time on such
Transmittal Date; (ii) such order is accompanied or followed by the requisite
number of shares of the Fund, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m., Eastern Time, (for the Fund shares) on the
next Business Day immediately following such Transmittal Date (the "DTC
Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any owed
to a Fund; and (iii) all other procedures set forth in the Participant Agreement
are properly followed. After the Trust has deemed an order for redemption
outside the Clearing Process received, the Trust will initiate procedures to
transfer the requisite Fund Securities which are expected to be delivered within
three Business Days and the Cash Redemption Amount, if any owed to the redeeming
Beneficial Owner to the AP on behalf of the redeeming Beneficial Owner by the
-72-
third Business Day following the Transmittal Date on which such redemption order
is deemed received by the Trust.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received upon redemption will be made by the
Custodian according to the procedures set forth in this SAI under "Determination
of Net Asset Value" computed on the Business Day on which a redemption order is
deemed received by the Trust. Therefore, if a redemption order in proper form is
submitted to the Transfer Agent by a DTC Participant not later than Closing Time
on the Transmittal Date, and the requisite number of shares of a Fund are
delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the
Fund Securities and the Cash Redemption Amount to be delivered/received will be
determined by the Custodian on such Transmittal Date. If, however, either (i)
the requisite number of shares of a Fund are not delivered by the DTC
Cut-Off-Time, as described above, or (ii) the redemption order is not submitted
in proper form, then the redemption order will not be deemed received as of the
Transmittal Date. In such case, the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received will be computed on the Business Day
following the Transmittal Date provided that the Fund shares of a Fund are
delivered through DTC to the Custodian by 11:00 a.m. the following Business Day
pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the
Trust may in its discretion exercise its option to redeem such Fund shares in
cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption
in cash that a Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the net asset value of its Fund
shares based on the net asset value of shares of a Fund next determined after
the redemption request is received in proper form (minus a redemption
transaction fee and additional charge for requested cash redemptions specified
above, to offset the Fund's brokerage and other transaction costs associated
with the disposition of Fund Securities). The Funds may also, in their sole
discretion, upon request of a shareholder, provide such redeemer a portfolio of
securities that differs from the exact composition of the Fund Securities, or
cash lieu of some securities added to the Cash Component, but in no event will
the total value of the securities delivered and the cash transmitted differ from
the net asset value. Redemptions of Fund shares for Fund Securities will be
subject to compliance with applicable federal and state securities laws and each
Fund (whether or not it otherwise permits cash redemptions) reserves the right
to redeem Creation Unit Aggregations for cash to the extent that the Trust could
not lawfully deliver specific Fund Securities upon redemptions or could not do
so without first registering the Fund Securities under such laws. An AP or an
investor for which it is acting subject to a legal restriction with respect to a
particular stock included in the Fund Securities applicable to the redemption of
a Creation Unit Aggregation may be paid an equivalent amount of cash. The AP may
request the redeeming Beneficial Owner of the Fund shares to complete an order
form or to enter into agreements with respect to such matters as compensating
cash payment, beneficial ownership of shares or delivery instructions.
The chart below describes in further detail the placement of redemption
orders outside the clearing process.
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[Enlarge/Download Table]
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CREATION THROUGH NSCC
STANDARD ORDERS 4:00 p.m. No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
CUSTOM ORDERS 3:00 p.m. No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
Orders received
after 3:00 p.m. will
be treated as
standard orders.
CREATION OUTSIDE NSCC
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper form Deposit Securities must delivered.
must be received by be received by a Fund's
the Distributor. account through DTC.
2:00 p.m. (ET)
Cash Component must be
received by the
Custodian.
STANDARD ORDERS CREATED 4:00 p.m. (ET) 11:00 a.m. (ET) No action. 1:00 p.m.
IN ADVANCE OF RECEIPT
BY THE TRUST OF ALL OR Order in proper form Available Deposit Missing Deposit
A PORTION OF THE must be received by Securities. Securities are due to
DEPOSIT SECURITIES the Distributor. the Trust or the Trust
Cash in an amount equal may use cash on deposit
to the sum of (i) the to purchase missing
Cash Component, plus Deposit Securities.
(ii) 115% of the market
value of the Creation Unit
undelivered Deposit Aggregations will be
Securities. delivered.
CUSTOM ORDERS 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper form Deposit Securities must delivered.
must be received by be received by a Fund's
the Distributor. account through DTC.
Order received after 2:00 p.m. (ET)
3:00 p.m. will be
treated as standard Cash Component must be
orders. received by the
Custodian.
REDEMPTION THROUGH NSCC
STANDARD ORDERS 4:00 p.m. (ET) No action. No action. Fund Securities and Cash
Redemption Amount will
Order must be be transferred.
received by the
Transfer Agent.
Orders received
after 4:00 p.m. (ET)
will be deemed
received on the next
business day (T+1)
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[Enlarge/Download Table]
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CUSTOM ORDERS 3:00 p.m. (ET) No action. No action. Fund Securities and Cash
Redemption Amount will
Order must be be transferred.
received by the
Transfer Agent
Order received after
3:00 p.m. will be
treated as standard
orders.
REDEMPTION OUTSIDE NSCC
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash
Redemption Amount are
Order must be Fund shares must be delivered to the
received by the delivered through DTC redeeming beneficial
Transfer Agent. to the Custodian. owner.
Order received after 2:00 p.m.
4:00 p.m. (ET) will
be deemed received Cash Component, if any,
on the next business is due.
day (T+1).
*If the order is not in
proper form or the Fund
shares are not
delivered, then the
order will not be
deemed received as of
T.
CUSTOM ORDERS 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash
Redemption Amount are
Order must be Fund shares must be delivered to the
received by the delivered through DTC redeeming beneficial
Transfer Agent. to the Custodian. owner.
Order received after 2:00 p.m.
3:00 p.m. will be
treated as standard Cash Component, if any,
orders. is due.
*If the order is not in
proper form or the Fund
shares are not
delivered, then the
order will not be
deemed received as of T.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax
consequences of owning shares of a Fund. This section is current as of the date
of the Prospectus. Tax laws and interpretations change frequently, and these
summaries do not describe all of the tax consequences to all taxpayers. For
example, these summaries generally do not describe your situation if you are a
corporation, a non-U.S. person, a broker-dealer, or other investor with special
circumstances. In addition, this section does not describe your state, local or
foreign tax consequences.
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This federal income tax summary is based in part on the advice of counsel
to the Funds. The Internal Revenue Service could disagree with any conclusions
set forth in this section. In addition, our counsel was not asked to review, and
has not reached a conclusion with respect to the federal income tax treatment of
the assets to be deposited in the Funds. This may not be sufficient for
prospective investors to use for the purpose of avoiding penalties under federal
tax law.
As with any investment, prospective investors should seek advice based on
their individual circumstances from their own tax advisor.
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, each Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies, or net income derived from interests in certain publicly traded
partnerships; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of each Fund's assets is
represented by cash and cash items (including receivables), U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer generally limited for
the purposes of this calculation to an amount not greater than 5% of the value
of each Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. government securities or
the securities of other regulated investment companies) of any one issuer, or
two or more issuers which a Fund controls which are engaged in the same, similar
or related trades or businesses, or the securities of one or more of certain
publicly traded partnerships; and (c) distribute at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and net short-term capital gains in excess of net long-term capital losses) and
at least 90% of its net tax-exempt interest income each taxable year. There are
certain exceptions for failure to qualify if the failure is for reasonable cause
or is de minimis, and certain corrective action is taken and certain tax
payments are made by a Fund.
As regulated investment companies, the Funds generally will not be subject
to U.S. federal income tax on their investment company taxable income (as that
term is defined in the Code, but without regard to the deduction for dividends
paid) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that they distribute to shareholders. Each
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gain. If a Fund
retains any net capital gain or investment company taxable income, it will
generally be subject to federal income tax at regular corporate rates on the
amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, each Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
-76-
year, (2) at least 98.2% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. In order to prevent
application of the excise tax, the Funds intend to make its distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by a Fund in October, November or December with a record date in such a month
and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Subject to certain reasonable cause and de minimis exceptions, if a Fund
failed to qualify as a regulated investment company or failed to satisfy the 90%
distribution requirement in any taxable year, the Fund would be taxed as an
ordinary corporation on its taxable income (even if such income were distributed
to its shareholders) and all distributions out of earnings and profits would be
taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Funds' investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, certain ordinary income distributions received from a Fund may
be taxed at capital gains tax rates. In particular, ordinary income dividends
received by an individual shareholder from regulated investment companies such
as the Funds are generally taxed at the same rates that apply to net capital
gain, provided that certain holding period requirements are satisfied and
provided the dividends are attributable to qualifying dividends received by each
Fund itself. Dividends received by the Funds from REITs and foreign corporations
are qualifying dividends eligible for this lower tax rate only in certain
circumstances. The Funds will provide notice to its shareholders of the amount
of any distributions that may be taken into account as a dividend which is
eligible for the capital gains tax rates. The Funds cannot make any guarantees
as to the amount of any distribution which will be regarded as a qualifying
dividend.
Under the "Health Care and Education Reconciliation Act of 2010," income
from a Fund may also be subject to a new 3.8% "Medicare tax" imposed for taxable
years beginning after 2012. This tax will generally apply to net investment
income if the taxpayer's adjusted gross income exceeds certain threshold
amounts, which are $250,000 in the case of married couples filing joint returns
and $200,000 in the case of single individuals.
A corporation that owns shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
Funds because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on shares that are attributable to qualifying dividends
received by the Funds from certain domestic corporations may be reported by the
Funds as being eligible for the dividends received deduction.
-77-
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly reported as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund shares. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such Share equal to the value of a
Share of a Fund on the reinvestment date. A distribution of an amount in excess
of a Fund's current and accumulated earnings and profits will be treated by a
shareholder as a return of capital which is applied against and reduces the
shareholder's basis in his or her shares. To the extent that the amount of any
such distribution exceeds the shareholder's basis in his or her shares, the
excess will be treated by the shareholder as gain from a sale or exchange of the
shares.
Shareholders will be notified annually as to the U.S. federal income tax
status of distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the value of those shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of shares of the Funds, which a
shareholder holds as a capital asset, such a shareholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
shareholder's holding period for the shares. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the shares have been held for more than
one year.
Any loss realized on a sale or exchange will be disallowed to the extent
that shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gain received by the
shareholder with respect to such shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If a shareholder exchanges equity securities for Creation Units the
shareholder will generally recognize a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the
time and the shareholder's aggregate basis in the securities surrendered and the
Cash Component paid. If a shareholder exchanges Creation Units for equity
securities, then the shareholder will generally recognize a gain or loss equal
to the difference between the shareholder's basis in the Creation Units and the
aggregate market value of the securities received and the Cash Redemption
Amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing "wash sales,"
or on the basis that there has been no significant change in economic position.
-78-
NATURE OF FUND INVESTMENTS
Certain of the Funds' investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Funds to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions.
FUTURES CONTRACTS AND OPTIONS
The Funds' transactions in Futures Contracts and options will be subject
to special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Funds (i.e., may affect whether
gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Funds and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions
to shareholders. These provisions also (i) will require the Funds to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out); and (ii) may cause the Funds to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a
regulated investment company and the distribution requirements for avoiding
excise taxes.
INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS
If a Fund holds an equity interest in any PFICs, which are generally
certain foreign corporations that receive at least 75% of their annual gross
income from passive sources (such as interest, dividends, certain rents and
royalties or capital gains) or that hold at least 50% of their assets in
investments producing such passive income, the Fund could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its shareholders. A Fund will not be able to pass
through to its shareholders any credit or deduction for such taxes. A Fund may
be able to make an election that could ameliorate these adverse tax
consequences. In this case, a Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, a Fund might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax (described above). Dividends paid by PFICs are not treated as
qualified dividend income.
-79-
BACKUP WITHHOLDING
The Funds may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide the Funds with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. This withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
In addition to the rules described in this section concerning the
potential imposition of withholding on distributions to non-U.S. persons,
distributions after June 30, 2014, to non-U.S. persons that are "financial
institutions" may be subject to a withholding tax of 30% unless an agreement is
in place between the financial institution and the U.S. Treasury to collect and
disclose information about accounts, equity investments, or debt interests in
the financial institution held by one or more U.S. persons or the institution is
resident in a jurisdiction that has entered into such an agreement with the U.S.
Treasury. For these purposes, a "financial institution" means any entity that
(i) accepts deposits in the ordinary course of a banking or similar business,
(ii) holds financial assets for the account of others as a substantial portion
of its business, or (iii) is engaged (or holds itself out as being engaged)
primarily in the business of investing, reinvesting or trading in securities,
partnership interests, commodities or any interest (including a futures contract
or option) in such securities, partnership interests or commodities.
Dispositions of shares by such persons may be subject to such withholding after
December 31, 2016.
Distributions to non-financial non-U.S. entities (other than publicly
traded foreign entities, entities owned by residents of U.S. possessions,
foreign governments, international organizations, or foreign central banks)
after June 30, 2014, will also be subject to a withholding tax of 30% if the
entity does not certify that the entity does not have any substantial U.S.
owners or provide the name, address and TIN of each substantial U.S. owner.
Dispositions of shares by such persons may be subject to such withholding after
December 31, 2016.
Income Not Effectively Connected. If the income from a Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
shareholder, distributions of investment company taxable income will generally
be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by a Fund
which are properly reported by the Fund as undistributed capital gains will not
be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the
-80-
non-U.S. shareholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would be subject to U.S. income tax on his or her worldwide
income at the graduated rates applicable to U.S. citizens, rather than the 30%
U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien
individual, the Funds may be required to withhold U.S. income tax from
distributions of net capital gain unless the non-U.S. shareholder certifies his
or her non-U.S. status under penalties of perjury or otherwise establishes an
exemption. If a non-U.S. shareholder is a nonresident alien individual, any gain
such shareholder realizes upon the sale or exchange of such shareholder's shares
of the Funds in the United States will ordinarily be exempt from U.S. tax unless
the gain is U.S. source income and such shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements.
In the case of dividends with respect to taxable years of a Fund
beginning prior to 2014, distributions from the Trust that are properly reported
by the Fund as an interest-related dividend attributable to certain interest
income received by the Fund or as a short-term capital gain dividend
attributable to certain net short-term capital gain income received by the Fund
may not be subject to U.S. federal income taxes, including withholding taxes
when received by certain foreign investors, provided that the Fund makes certain
elections and certain other conditions are met. In addition, capital gains
distributions attributable to gains from U.S. real property interests (including
certain U.S. real property holding corporations) will generally be subject to
United States withholding tax and will give rise to an obligation on the part of
the foreign shareholder to file a United States tax return.
Income Effectively Connected. If the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by a non-U.S. shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by a Fund which are properly reported as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Funds will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Non-U.S.
corporate shareholders may also be subject to the branch profits tax imposed by
the Code. The tax consequences to a non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Non-U.S. shareholders are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Funds.
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Funds.
-81-
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Net Asset Value."
The per share net asset value of a Fund is determined by dividing the
total value of the securities and other assets, less liabilities, by the total
number of shares outstanding. Under normal circumstances, daily calculation of
the net asset value will utilize the last closing price of each security held by
the Fund at the close of the market on which such security is principally
listed. In determining net asset value, portfolio securities for a Fund for
which accurate market quotations are readily available will be valued by the
Fund accounting agent as follows:
(1) Common stocks and other equity securities listed on any national
or foreign exchange other than NASDAQ(R) and the London Stock Exchange
Alternative Investment Market ("AIM") will be valued at the last sale
price on the business day as of which such value is being determined.
Securities listed on NASDAQ(R) or AIM are valued at the official closing
price on the business day as of which such value is being determined. If
there has been no sale on such day, or no official closing price in the
case of securities traded on NASDAQ(R) and AIM, the securities are valued
at the mean of the most recent bid and ask prices on such day. Portfolio
securities traded on more than one securities exchange are valued at the
last sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
(2) Securities traded in the OTC market are valued at the midpoint
between the bid and asked price, if available, and otherwise at their
closing bid prices.
(3) Exchange traded options and Futures Contracts will be valued at
the closing price in the market where such contracts are principally
traded. OTC options and Futures Contracts will be valued at the midpoint
between the bid and asked price, if available, and otherwise at their
closing bid prices.
(4) Forward foreign currency exchange contracts which are traded in
the United States on regulated exchanges will be valued by calculating the
mean between the last bid and asked quotations supplied to a pricing
service by certain independent dealers in such contracts.
In addition, the following types of securities will be valued as follows:
(1) Fixed-income securities with a remaining maturity of 60 days or
more will be valued by the fund accounting agent using a pricing service.
When price quotes are not available, fair value is based on prices of
comparable securities.
(2) Fixed-income securities maturing within 60 days are valued by
the Fund accounting agent on an amortized cost basis.
-82-
(3) Repurchase agreements will be valued as follows. Overnight
repurchase agreements will be valued at cost. Term repurchase agreements
(i.e., those whose maturity exceeds seven days) will be valued by First
Trust at the average of the bid quotations obtained daily from at least
two recognized dealers.
The value of any portfolio security held by a Fund for which market
quotations are not readily available will be determined by First Trust in a
manner that most fairly reflects fair market value of the security on the
valuation date, based on a consideration of all available information.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board of Trustees or its delegate
at fair value. These securities generally include but are not limited to,
restricted securities (securities which may not be publicly sold without
registration under the 1933 Act) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of Fund net asset value (as may be the case in foreign
markets on which the security is primarily traded) or make it difficult or
impossible to obtain a reliable market quotation; and a security whose price, as
provided by the pricing service, does not reflect the security's "fair value."
As a general principle, the current "fair value" of an issue of securities would
appear to be the amount that the owner might reasonably expect to receive for
them upon their current sale. A variety of factors may be considered in
determining the fair value of such securities.
Valuing a Fund's investments using fair value pricing will result in using
prices for those investments that may differ from current market valuations. Use
of fair value prices and certain current market valuations could result in a
difference between the prices used to calculate a Fund's net asset value and the
prices used by the Index, which, in turn, could result in a difference between a
Fund's performance and the performance of the Index.
Because foreign markets may be open on different days than the days during
which a shareholder may purchase the shares of a Fund, the value of a Fund's
investments may change on the days when shareholders are not able to purchase
the shares of the Fund.
The value of assets denominated in foreign currencies is converted into
U.S. dollars using exchange rates in effect at the time of valuation. Any use of
a different rate from the rates used by the Index may adversely affect a Fund's
ability to track its respective Index.
A Fund may suspend the right of redemption for the Fund only under the
following unusual circumstances: (i) when the NYSE is closed (other than
weekends and holidays) or trading is restricted; (ii) when trading in the
markets normally utilized is restricted, or when an emergency exists as
determined by the SEC so that disposal of a Fund's investments or determination
of its net assets is not reasonably practicable; or (iii) during any period when
the SEC may permit.
-83-
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Dividends, Distributions and
Taxes."
General Policies. Dividends from net investment income of the Funds, if
any, are declared and paid quarterly. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Trust may
make distributions on a more frequent basis. The Trust reserves the right to
declare special distributions if, in its reasonable discretion, such action is
necessary or advisable to preserve the status of each Fund as a regulated
investment company or to avoid imposition of income or excise taxes on
undistributed income.
Dividends and other distributions of Fund shares are distributed, as
described below, on a pro rata basis to Beneficial Owners of such shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Funds.
Dividend Reinvestment Service. No reinvestment service is provided by the
Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of the Funds for reinvestment
of their dividend distributions. Beneficial Owners should contact their brokers
in order to determine the availability and costs of the service and the details
of participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole shares of each Fund purchased in the secondary
market.
MISCELLANEOUS INFORMATION
Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois
60603, is counsel to the Trust.
Independent Registered Public Accounting Firm. Deloitte & Touche LLP, 111
South Wacker Drive, Chicago, Illinois 60606, serves as the Funds' independent
registered public accounting firm. The firm audits each Fund's financial
statements and performs other related audit services.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for the Funds,
contained in the Annual Reports to Shareholders dated December 31, 2013, are
incorporated by reference into this Statement of Additional Information and have
been audited by Deloitte & Touche LLP, independent registered public accounting
firm, whose report also appears in the Annual Reports and is also incorporated
-84-
by reference herein. No other parts of the Annual Reports are incorporated by
reference herein. The Annual Reports are available without charge by calling
(800) 621-1675 or by visiting the SEC's website at http://www.sec.gov.
-85-
EXHIBIT A - BENEFICIAL OWNERSHIP TABLE
[Enlarge/Download Table]
--------------------------------------------------------------- ----------------------
% OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED
--------------------------------------------------------------- ----------------------
FIRST TRUST CAPITAL STRENGTH ETF
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 15.47%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 14.94%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 11.84%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
Ameriprise Enterprise Investment Services Inc. 9.43%
2178 AXP Financial Center
Minneapolis, Minnesota 55474
--------------------------------------------------------------- ----------------------
LPL Financial Corp. 6.46%
9785 Towne Center Drive
San Diego, California 92121
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 6.04%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 5.62%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
FIRST TRUST CBOE(R) S&P 500(R) VIX(R) TAIL HEDGE FUND
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 38.31%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 14.60%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 9.03%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
A-1
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 8.65%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
Robert W. Baird & Co. 6.57%
227 West Monroe Street
Chicago, Illinois 60606
--------------------------------------------------------------- ----------------------
FIRST TRUST DOW JONES INTERNET INDEX FUND
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 13.76%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 12.71%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 10.73%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 8.43%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Brown Brothers Harriman & Co. 7.65%
525 Washington Tower Newport Tower
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 7.55%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 7.24%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
FIRST TRUST DOW JONES SELECT MICROCAP INDEX FUND
--------------------------------------------------------------- ----------------------
Raymond James & Associates, Inc. 14.68%
880 Carilion Parkway, P.O. Box 12749
St. Petersburg, Florida 33716
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 13.22%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 11.21%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Robert W. Baird & Co. 9.90%
227 West Monroe Street
Chicago, Illinois 60606
--------------------------------------------------------------- ----------------------
A-2
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 7.57%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 5.10%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 5.06%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
FIRST TRUST ISE CHINDIA INDEX FUND
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 13.28%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 11.08%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 9.94%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 9.60%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 6.22%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
Desjardins Group 5.51%
1170, Rue Peel, Bureau 600
Montreal (Quebec) H3B 0B1
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 5.34%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 13.90%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 11.76%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 10.01%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
A-3
--------------------------------------------------------------- ----------------------
LPL Financial Corp. 8.35%
9785 Towne Center Drive
San Diego, California 92121
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 6.99%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
FIRST TRUST ISE WATER INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 27.97%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 13.26%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 10.04%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 8.49%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 7.68%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 5.18%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 14.21%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 11.68%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 9.49%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 9.09%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 9.07%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
A-4
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 8.28%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 5.58%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 5.31%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 16.17%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 12.96%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Raymond James & Associates, Inc. 10.16%
880 Carilion Parkway, P.O. Box 12749
St. Petersburg, Florida 33716
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 8.75%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 8.46%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 7.91%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 5.40%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX FUND
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 22.33%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 17.85%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 10.24%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
A-5
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 8.00%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 6.01%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 5.89%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX FUND
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 17.01%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 13.07%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 10.58%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 8.00%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
Bank of New York Mellon 7.16%
One Wall Street
New York, New York 10286
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 6.53%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 6.40%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 5.58%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
FIRST TRUST NASDAQ(R) ABA COMMUNITY BANK INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 31.32%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 11.01%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
A-6
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 8.47%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Raymond James & Associates, Inc. 7.42%
880 Carilion Parkway, P.O. Box 12749
St. Petersburg, Florida 33716
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 7.17%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
Bank of New York Mellon 5.95%
One Wall Street
New York, New York 10286
--------------------------------------------------------------- ----------------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 16.43%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 13.50%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 12.48%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 11.76%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 8.95%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 5.84%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
FIRST TRUST NYSE ARCA BIOTECHNOLOGY INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 18.75%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 16.35%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 7.86%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
A-7
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 7.03%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 6.64%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
Raymond James & Associates, Inc. 6.06%
880 Carilion Parkway, P.O. Box 12749
St. Petersburg, Florida 33716
--------------------------------------------------------------- ----------------------
UBS Financial Services Inc. 5.65%
480 Washington Boulevard
Jersey City, New Jersey 07310
--------------------------------------------------------------- ----------------------
FIRST TRUST S&P REIT INDEX FUND
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 19.36%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 15.68%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
Raymond James & Associates, Inc. 9.36%
880 Carilion Parkway, P.O. Box 12749
St. Petersburg, Florida 33716
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 9.06%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
BMO Trust 8.32%
51 Mercedes Way
Edgewood, NY 11717
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 7.22%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
FIRST TRUST US IPO INDEX FUND
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 11.80%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 11.27%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 10.34%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
A-8
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 7.99%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 7.16%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 6.56%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 5.11%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 11.63%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 11.22%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 10.22%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 9.34%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 7.83%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 5.37%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
Hilliard Lyons 5.08%
500 West Jefferson Street
Louisville, KY 40202
--------------------------------------------------------------- ----------------------
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 12.14%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 9.90%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
A-9
--------------------------------------------------------------- ----------------------
Schwab (Charles) & Co., Inc. 9.88%
2423 East Lincoln Drive
Phoenix, Arizona 85016
--------------------------------------------------------------- ----------------------
Ameriprise Enterprise Investment Services Inc. 9.27%
2178 AXP Financial Center
Minneapolis, Minnesota 55474
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 9.09%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
Pershing, L.L.C. 7.78%
1 Pershing Plaza,
Jersey City, New Jersey 07399
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 7.29%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
Raymond James & Associates, Inc. 6.73%
880 Carilion Parkway, P.O. Box 12749
St. Petersburg, Florida 33716
--------------------------------------------------------------- ----------------------
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND
--------------------------------------------------------------- ----------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 23.28%
101 Hudson Street, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------------------------- ----------------------
National Financial Services Corporation 10.83%
200 Liberty Street
New York, New York 10281
--------------------------------------------------------------- ----------------------
TD Ameritrade Clearing Inc. 8.70%
1005 Ameritrade Place
Bellevue, Nebraska 68005
--------------------------------------------------------------- ----------------------
Morgan Stanley Smith Barney LLC 8.57%
200 Westchester Avenue
Purchase, New York 10577
--------------------------------------------------------------- ----------------------
First Clearing, L.L.C. 8.11%
One North Jefferson Street
St. Louis, Missouri 63103
--------------------------------------------------------------- ----------------------
A-10
APPENDIX B
ISS
-------------
An MSCI Brand
Transparency. Inclusiveness. Global Expertise.
2014 U.S. Proxy Voting Concise Guidelines
December 19, 2013
Institutional Shareholder Services Inc.
Copyright (C) 2013 by ISS
ISS' 2014 U.S. Proxy Voting Concise Guidelines
The policies contained herein are a sampling of select, key proxy voting
guidelines and are not exhaustive. A full listing of ISS' 2014
proxy voting guidelines can be found at:
http://www.issgovernance.com/policy/2014/policy_information
ROUTINE/MISCELLANEOUS
Auditor Ratification
Vote for proposals to ratify auditors unless any of the following apply:
o An auditor has a financial interest in or association with the
company, and is therefore not independent;
o There is reason to believe that the independent auditor has rendered
an opinion that is neither accurate nor indicative of the company's
financial position;
o Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP, or material
weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees > audit fees + audit-related fees + tax
compliance/preparation fees
o o o o o
BOARD OF DIRECTORS:
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
1. Accountability
2. Responsiveness
3. Composition
4. Independence
Generally vote for director nominees, except under the following circumstances:
1. Accountability
B-1
Vote against(1) or withhold from the entire board of directors (except new
nominees(2), who should be considered case-by-case) for the following:
Problematic Takeover Defenses
Classified Board Structure:
1.1. The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for
election. All appropriate nominees (except new) may be held
accountable.
Director Performance Evaluation:
1.2. The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only). Take into consideration the company's
five-year total shareholder return and operational metrics.
Problematic provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director
elections or a majority vote standard with no plurality
carve-out for contested elections;
o The inability of shareholders to call special meetings;
o The inability of shareholders to act by written consent;
o A dual-class capital structure; and/or
o A non-shareholder-approved poison pill.
Poison Pills:
1.3. The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote against or withhold from nominees every year until
this feature is removed;
1.4. The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any
"short-term" pill (12 months or less), without shareholder approval.
A commitment or policy that puts a newly adopted pill to a binding
shareholder vote may potentially offset an adverse vote
--------
1 In general, companies with a plurality vote standard use "Withhold" as the
contrary vote option in director elections; companies with a majority vote
standard use "Against". However, it will vary by company and the proxy must
be checked to determine the valid contrary vote option for the particular
company.
2 A "new nominee" is any current nominee who has not already been elected by
shareholders and who joined the board after the problematic action in
question transpired. If ISS cannot determine whether the nominee joined the
board before or after the problematic action transpired, the nominee will be
considered a "new nominee" if he or she joined the board within the 12
months prior to the upcoming shareholder meeting.
B-2
recommendation. Review such companies with classified boards every
year, and such companies with annually elected boards at least once
every three years, and vote against or withhold votes from all
nominees if the company still maintains a non-shareholder-approved
poison pill; or
1.5. The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote case-by-case on all nominees if:
1.6. The board adopts a poison pill with a term of 12 months or less
("short-term pill") without shareholder approval, taking into
account the following factors:
o The date of the pill's adoption relative to the date of the
next meeting of shareholders--i.e., whether the company had
time to put the pill on ballot for shareholder ratification
given the circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
1.7. The non-audit fees paid to the auditor are excessive (see discussion
under "Auditor Ratification");
1.8. The company receives an adverse opinion on the company's financial
statements from its auditor; or
1.9. There is persuasive evidence that the Audit Committee entered into
an inappropriate indemnification agreement with its auditor that
limits the ability of the company, or its shareholders, to pursue
legitimate legal recourse against the audit firm.
Vote case-by-case on members of the Audit Committee, and potentially the full
board, if:
1.10. Poor accounting practices are identified that rise to a level of
serious concern, such as: fraud, misapplication of GAA; and material
weaknesses identified in Section 404 disclosures. Examine the
severity, breadth, chronological sequence, and duration, as well as
the company's efforts at remediation or corrective actions, in
determining whether withhold/against votes are warranted.
Problematic Compensation Practices/Pay for Performance Misalignment
B-3
In the absence of an Advisory Vote on Executive Compensation ballot item or in
egregious situations, vote against or withhold from the members of the
Compensation Committee, and potentially the full board, if:
1.11. There is a significant misalignment between CEO pay and company
performance (pay for performance);
1.12. The company maintains significant problematic pay practices;
1.13. The board exhibits a significant level of poor communication and
responsiveness to shareholders;
1.14. The company fails to submit one-time transfers of stock options to a
shareholder vote; or
1.15. The company fails to fulfill the terms of a burn rate commitment
made to shareholders.
Vote case-by-case on Compensation Committee members (or, in exceptional cases,
the full board) and the Management Say-on-Pay proposal if:
1.16. The company's previous say-on-pay proposal received the support of
less than 70 percent of votes cast, taking into account:
o The company's response, including:
- Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
- Specific actions taken to address the issues that
contributed to the low level of support;
- Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
Governance Failures
Under extraordinary circumstances, vote against or withhold from directors
individually, committee members, or the entire board, due to:
1.17. Material failures of governance, stewardship, risk oversight(3), or
fiduciary responsibilities at the company;
1.18. Failure to replace management as appropriate; or
1.19. Egregious actions related to a director's service on other boards
that raise substantial doubt about his or her ability to effectively
oversee management and serve the best interests of shareholders at
any company.
--------
3 Examples of failure of risk oversight include, but are not limited to:
bribery; large or serial fines or sanctions from regulatory bodies;
significant adverse legal judgments or settlements; hedging of company
stock; or significant pledging of company stock.
B-4
2. Responsiveness
Vote case-by-case on individual directors, committee members, or the entire
board of directors, as appropriate, if:
2.1. The board failed to act on a shareholder proposal that received the
support of a majority of the shares cast in the previous year.
Factors that will be considered are:
o Disclosed outreach efforts by the board to shareholders in the
wake of the vote;
o Rationale provided in the proxy statement for the level of
implementation;
o The subject matter of the proposal;
o The level of support for and opposition to the resolution in
past meetings;
o Actions taken by the board in response to the majority vote
and its engagement with shareholders;
o The continuation of the underlying issue as a voting item on
the ballot (as either shareholder or management proposals);
and
o Other factors as appropriate.
2.2. The board failed to act on takeover offers where the majority of
shares are tendered;
2.3. At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company
has failed to address the issue(s) that caused the high
withhold/against vote;
2.4. The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received the majority of
votes cast at the most recent shareholder meeting at which
shareholders voted on the say-on-pay frequency; or
2.5. The board implements an advisory vote on executive compensation on a
less frequent basis than the frequency that received a plurality,
but not a majority, of the votes cast at the most recent shareholder
meeting at which shareholders voted on the say-on-pay frequency,
taking into account:
o The board's rationale for selecting a frequency that is
different from the frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a
history of problematic compensation practices; and
o The previous year's support level on the company's say-on-pay
proposal.
B-5
3. Composition
Attendance at Board and Committee Meetings:
3.1. Generally vote against or withhold from directors (except new
nominees, who should be considered case-by-case(4)) who attend less
than 75 percent of the aggregate of their board and committee
meetings for the period for which they served, unless an acceptable
reason for absences is disclosed in the proxy or another SEC filing.
Acceptable reasons for director absences are generally limited to
the following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting (when the total of all meetings is
three or fewer).
3.2. If the proxy disclosure is unclear and insufficient to determine
whether a director attended at least 75 percent of the aggregate of
his/her board and committee meetings during his/her period of
service, vote against or withhold from the director(s) in question.
Overboarded Directors:
Vote against or withhold from individual directors who:
3.3. Sit on more than six public company boards; or
3.4. Are CEOs of public companies who sit on the boards of more than two
public companies besides their own--withhold only at their outside
boards(5).
4. Independence
Vote against or withhold from Inside Directors and Affiliated Outside Directors
when:
4.1. The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
4.2. The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
4.3. The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such
a committee; or
4.4. Independent directors make up less than a majority of the directors.
o o o o o
--------
4 For new nominees only, schedule conflicts due to commitments made prior to
their appointment to the board are considered if disclosed in the proxy or
another SEC filing.
5 Although all of a CEO's subsidiary boards will be counted as separate
boards, ISS will not recommend a withhold vote from the CEO of a parent
company board or any of the controlled (>50 percent ownership) subsidiaries
of that parent, but will do so at subsidiaries that are less than 50 percent
controlled and boards outside the parent/subsidiary relationships.
B-6
Proxy Access
ISS supports proxy access as an important shareholder right, one that is
complementary to other best-practice corporate governance features. However, in
the absence of a uniform standard, proposals to enact proxy access may vary
widely; as such, ISS is not setting forth specific parameters at this time and
will take a case-by-case approach in evaluating these proposals.
Vote case-by-case on proposals to enact proxy access, taking into account, among
other factors:
o Company-specific factors; and
o Proposal-specific factors, including:
- The ownership thresholds proposed in the resolution (i.e.,
percentage and duration);
- The maximum proportion of directors that shareholders may
nominate each year; and
- The method of determining which nominations should appear
on the ballot if multiple shareholders submit nominations.
o o o o o
Proxy Contests--Voting for Director Nominees in Contested Elections
Vote case-by-case on the election of directors in contested elections,
considering the following factors:
o Long-term financial performance of the target company relative to its
industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
When the addition of shareholder nominees to the management card ("proxy access
nominees") results in a number of nominees on the management card which exceeds
the number of seats available for election, vote case-by-case considering the
same factors listed above.
o o o o o
SHAREHOLDER RIGHTS & DEFENSES
Poison Pills- Management Proposals to Ratify Poison Pill
Vote case-by-case on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
B-7
o No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or
seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
o o o o o
Poison Pills- Management Proposals to Ratify a Pill to Preserve Net Operating
Losses (NOLs)
Vote against proposals to adopt a poison pill for the stated purpose of
protecting a company's net operating losses (NOL) if the term of the pill would
exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter
of three years (or less) and the exhaustion of the NOL:
o The ownership threshold to transfer (NOL pills generally have a
trigger slightly below 5 percent);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment to
cause expiration of the pill upon exhaustion or expiration of NOLs);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
o o o o o
Shareholder Ability to Act by Written Consent
Generally vote against management and shareholder proposals to restrict or
prohibit shareholders' ability to act by written consent.
Generally vote for management and shareholder proposals that provide
shareholders with the ability to act by written consent, taking into account the
following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
B-8
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous
shareholder proposals.
Vote case-by-case on shareholder proposals if, in addition to the considerations
above, the company has the following governance and antitakeover provisions:
o An unfettered(6) right for shareholders to call special meetings at a
10 percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
o o o o o
CAPITAL/RESTRUCTURING
Common Stock Authorization
Vote for proposals to increase the number of authorized common shares where the
primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote against proposals at companies with more than one class of common stock to
increase the number of authorized shares of the class of common stock that has
superior voting rights.
Vote against proposals to increase the number of authorized common shares if a
vote for a reverse stock split on the same ballot is warranted despite the fact
that the authorized shares would not be reduced proportionally.
Vote case-by-case on all other proposals to increase the number of shares of
common stock authorized for issuance. Take into account company-specific factors
that include, at a minimum, the following:
o Past Board Performance:
- The company's use of authorized shares during the last three years
o The Current Request:
- Disclosure in the proxy statement of the specific purposes of the
proposed increase;
- Disclosure in the proxy statement of specific and severe risks to
shareholders of not approving the request; and
--------
6 "Unfettered" means no restrictions on agenda items, no restrictions on the
number of shareholders who can group together to reach the 10 percent
threshold, and only reasonable limits on when a meeting can be called: no
greater than 30 days after the last annual meeting and no greater than 90
prior to the next annual meeting.
B-9
- The dilutive impact of the request as determined by an allowable
increase calculated by ISS (typically 100 percent of existing
authorized shares) that reflects the company's need for shares and
total shareholder returns.
o o o o o
Dual Class Structure
Generally vote against proposals to create a new class of common stock, unless:
o The company discloses a compelling rationale for the dual-class
capital structure, such as:
o The company's auditor has concluded that there is substantial doubt
about the company's ability to continue as a going concern; or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no
dilution to current shareholders in both the short term and long term;
and
o The new class is not designed to preserve or increase the voting power
of an insider or significant shareholder.
o o o o o
Preferred Stock Authorization
Vote for proposals to increase the number of authorized preferred shares where
the primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote against proposals at companies with more than one class or series of
preferred stock to increase the number of authorized shares of the class or
series of preferred stock that has superior voting rights.
Vote case-by-case on all other proposals to increase the number of shares of
preferred stock authorized for issuance. Take into account company-specific
factors that include, at a minimum, the following:
o Past Board Performance:
- The company's use of authorized preferred shares during the last
three years;
o The Current Request:
- Disclosure in the proxy statement of the specific purposes for the
proposed increase;
- Disclosure in the proxy statement of specific and severe risks to
shareholders of not approving the request;
- In cases where the company has existing authorized preferred
stock, the dilutive impact of the request as determined by an
allowable increase calculated by ISS (typically 100 percent of
existing authorized shares) that reflects the company's need for
shares and total shareholder returns; and
B-10
- Whether the shares requested are blank check preferred shares that
can be used for antitakeover purposes.
o o o o o
Mergers and Acquisitions
Vote case-by-case on mergers and acquisitions. Review and evaluate the merits
and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
o Valuation - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
o Market reaction - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
o Strategic rationale - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.
o Negotiations and process - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A fair
process helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The CIC figure presented in the "ISS
Transaction Summary" section of this report is an aggregate figure
that can in certain cases be a misleading indicator of the true value
transfer from shareholders to insiders. Where such figure appears to
be excessive, analyze the underlying assumptions to determine whether
a potential conflict exists.
o Governance - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
o o o o o
B-11
COMPENSATION
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect
corporations to adhere to in designing and administering executive and director
compensation programs:
1. Maintain appropriate pay-for-performance alignment, with emphasis on
long-term shareholder value: This principle encompasses overall
executive pay practices, which must be designed to attract, retain,
and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration,
among other factors, the link between pay and performance; the mix
between fixed and variable pay; performance goals; and equity-based
plan costs;
2. Avoid arrangements that risk "pay for failure": This principle
addresses the appropriateness of long or indefinite contracts,
excessive severance packages, and guaranteed compensation;
3. Maintain an independent and effective compensation committee: This
principle promotes oversight of executive pay programs by directors
with appropriate skills, knowledge, experience, and a sound process
for compensation decision-making (e.g., including access to
independent expertise and advice when needed);
4. Provide shareholders with clear, comprehensive compensation
disclosures: This principle underscores the importance of informative
and timely disclosures that enable shareholders to evaluate executive
pay practices fully and fairly;
5. Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in ensuring that compensation
to outside directors does not compromise their independence and
ability to make appropriate judgments in overseeing managers' pay and
performance. At the market level, it may incorporate a variety of
generally accepted best practices.
Advisory Votes on Executive Compensation--Management Proposals (Management
Say-on-Pay)
Vote case-by-case on ballot items related to executive pay and practices, as
well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation (Management
Say-on-Pay--MSOP) if:
o There is a significant misalignment between CEO pay and company
performance (pay for performance);
o The company maintains significant problematic pay practices;
o The board exhibits a significant level of poor communication and
responsiveness to shareholders.
B-12
Vote against or withhold from the members of the Compensation Committee and
potentially the full board if:
o There is no MSOP on the ballot, and an against vote on an MSOP is
warranted due to a pay for performance misalignment, problematic pay
practices, or the lack of adequate responsiveness on compensation
issues raised previously, or a combination thereof;
o The board fails to respond adequately to a previous MSOP proposal that
received less than 70 percent support of votes cast;
o The company has recently practiced or approved problematic pay
practices, including option repricing or option backdating; or
o The situation is egregious.
Vote against an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant portion
of the CEO's misaligned pay is attributed to non-performance-based
equity awards, taking into consideration:
- Magnitude of pay misalignment;
- Contribution of non-performance-based equity grants to overall
pay; and
- the proportion of equity awards granted in the last three fiscal
years concentrated at the named executive officer (NEO) level.
Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or
satisfactory alignment between pay and performance over a sustained period. With
respect to companies in the Russell 3000 index, this analysis considers the
following:
1. Peer Group(7) Alignment:
o The degree of alignment between the company's annualized TSR
rank and the CEO's annualized total pay rank within a peer
group, each measured over a three-year period.
o The multiple of the CEO's total pay relative to the peer group
median.
2. Absolute Alignment - the absolute alignment between the trend in CEO
pay and company TSR over the prior five fiscal years - i.e., the
difference between the trend in annual pay changes and the trend in
annualized TSR during the period.
--------
7 The revised peer group is generally comprised of 14-24 companies that are
selected using market cap, revenue (or assets for certain financial firms),
GICS industry group and company's selected peers' GICS industry group with
size constraints, via a process designed to select peers that are closest to
the subject company in terms of revenue/assets and industry and also within
a market cap bucket that is reflective of the company's.
B-13
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of non-Russell 3000 index
companies, misaligned pay and performance are otherwise suggested, our analysis
may include any of the following qualitative factors, if they are relevant to
the analysis to determine how various pay elements may work to encourage or to
undermine long-term value creation and alignment with shareholder interests:
o The ratio of performance- to time-based equity awards;
o The overall ratio of performance-based compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth in
revenue, profit, cash flow, etc., both absolute and relative to peers;
o Special circumstances related to, for example, a new CEO in the prior
FY or anomalous equity grant practices (e.g., bi-annual awards);
o Realizable pay(8) compared to grant pay; and
o Any other factors deemed relevant.
Problematic Pay Practices
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o Options Backdating.
Problematic Pay Practices related to Non-Performance-Based Compensation Elements
Pay elements that are not directly based on performance are generally evaluated
case-by-case considering the context of a company's overall pay program and
demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation
FAQ document for detail on specific pay practices that have been identified as
potentially problematic and may lead to negative recommendations if they are
deemed to be inappropriate or unjustified relative to executive pay best
practices. The list below highlights the problematic practices that carry
significant weight in this overall consideration and may result in adverse vote
recommendations:
o Repricing or replacing of underwater stock options/SARS without prior
shareholder approval (including cash buyouts and voluntary surrender
of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up related
to a secular trust or restricted stock vesting;
o New or extended agreements that provide for:
- CIC payments exceeding 3 times base salary and average/target/most
recent bonus;
--------
8 ISS research reports will include realizable pay for S&P 1500 companies.
B-14
- CIC severance payments without involuntary job loss or substantial
diminution of duties ("single" or "modified single" triggers);
- CIC payments with excise tax gross-ups (including "modified"
gross-ups).
Incentives that may Motivate Excessive Risk-Taking
o Multi-year guaranteed bonuses;
o A single or common performance metric used for short- and long-term
plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no
downside risk.
Factors that potentially mitigate the impact of risky incentives include
rigorous claw-back provisions and robust stock ownership/holding guidelines.
Options Backdating
The following factors should be examined case-by-case to allow for distinctions
to be made between "sloppy" plan administration versus deliberate action or
fraud:
o Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant date changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee, such
as canceling or re-pricing backdated options, the recouping of option
gains on backdated grants; and
o Adoption of a grant policy that prohibits backdating, and creates a
fixed grant schedule or window period for equity grants in the future.
Board Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related
to executive pay on the board's responsiveness to investor input and engagement
on compensation issues:
o Failure to respond to majority-supported shareholder proposals on
executive pay topics; or
o Failure to adequately respond to the company's previous say-on-pay
proposal that received the support of less than 70 percent of votes
cast, taking into account:
- The company's response, including:
o Disclosure of engagement efforts with major institutional
investors regarding the issues that contributed to the low
level of support;
o Specific actions taken to address the issues that contributed
to the low level of support;
o Other recent compensation actions taken by the company;
- Whether the issues raised are recurring or isolated;
B-15
- The company's ownership structure; and
- Whether the support level was less than 50 percent, which would
warrant the highest degree of responsiveness.
o o o o o
Frequency of Advisory Vote on Executive Compensation ("Say When on Pay")
Vote for annual advisory votes on compensation, which provide the most
consistent and clear communication channel for shareholder concerns about
companies' executive pay programs.
o o o o o
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or
Proposed Sale
Vote case-by-case on say on Golden Parachute proposals, including consideration
of existing change-in-control arrangements maintained with named executive
officers rather than focusing primarily on new or extended arrangements.
Features that may result in an against recommendation include one or more of the
following, depending on the number, magnitude, and/or timing of issue(s):
o Single- or modified-single-trigger cash severance;
o Single-trigger acceleration of unvested equity awards;
o Excessive cash severance (>3x base salary and bonus);
o Excise tax gross-ups triggered and payable (as opposed to a provision
to provide excise tax gross-ups);
o Excessive golden parachute payments (on an absolute basis or as a
percentage of transaction equity value); or
o Recent amendments that incorporate any problematic features (such as
those above) or recent actions (such as extraordinary equity grants)
that may make packages so attractive as to influence merger agreements
that may not be in the best interests of shareholders; or
o The company's assertion that a proposed transaction is conditioned on
shareholder approval of the golden parachute advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry
more weight on the overall analysis. However, the presence of multiple legacy
problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company's
advisory vote on compensation (management say-on-pay), ISS will evaluate the
say-on-pay proposal in accordance with these guidelines, which may give higher
weight to that component of the overall evaluation.
o o o o o
B-16
Equity-Based and Other Incentive Plans
Vote case-by-case on equity-based compensation plans. Vote against the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits repricing;
o A pay-for-performance misalignment is found;
o The company's three year burn rate exceeds the burn rate cap of its
industry group;
o The plan has a liberal change-of-control definition; or
o The plan is a vehicle for problematic pay practices.
SOCIAL/ENVIRONMENTAL ISSUES
Global Approach
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor standards and human
rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all
vote recommendations focuses on how the proposal may enhance or protect
shareholder value in either the short or long term.
Generally vote case-by-case, taking into consideration whether implementation of
the proposal is likely to enhance or protect shareholder value, and, in
addition, the following will also be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or government regulation;
o If the company has already responded in an appropriate and sufficient
manner to the issue(s) raised in the proposal;
o Whether the proposal's request is unduly burdensome (scope or
timeframe) or overly prescriptive;
o The company's approach compared with any industry standard practices
for addressing the issue(s) raised by the proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient information is currently
available to shareholders from the company or from other publicly
available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would reveal proprietary or confidential
information that could place the company at a competitive
disadvantage.
o o o o o
B-17
Political Activities
Lobbying
Vote case-by-case on proposals requesting information on a company's lobbying
(including direct, indirect, and grassroots lobbying) activities, policies, or
procedures, considering:
o The company's current disclosure of relevant lobbying policies, and
management and board oversight;
o The company's disclosure regarding trade associations or other groups
that it supports, or is a member of, that engage in lobbying
activities; and
o Recent significant controversies, fines, or litigation regarding the
company's lobbying-related activities.
o o o o o
Political Contributions
Generally vote for proposals requesting greater disclosure of a company's
political contributions and trade association spending policies and activities,
considering:
o The company's current disclosure of policies and oversight mechanisms
related to its direct political contributions and payments to trade
associations or other groups that may be used for political purposes,
including information on the types of organizations supported and the
business rationale for supporting these organizations; and
o Recent significant controversies, fines, or litigation related to the
company's political contributions or political activities.
Vote against proposals barring a company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote against proposals to publish in newspapers and other media a company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
o o o o o
Political Ties
Generally vote against proposals asking a company to affirm political
nonpartisanship in the workplace, so long as:
o There are no recent, significant controversies, fines, or litigation
regarding the company's political contributions or trade association
spending; and
B-18
o The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and prohibit coercion.
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
o o o o o
8. Foreign Private Issuers Listed on U.S. Exchanges
Vote against (or withhold from) non-independent director nominees at companies
which fail to meet the following criteria: a majority-independent board, and the
presence of an audit, a compensation, and a nomination committee, each of which
is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are
comparable to those seen at U.S. companies, U.S. compensation policy will be
used to evaluate the compensation plan proposals. Otherwise, they, and all other
voting items, will be evaluated using the relevant ISS regional or market proxy
voting guidelines.
o o o o o
DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts (collectively, the "Information")
is the property of Institutional Shareholder Services Inc. (ISS), its
subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve, or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS,
B-19
NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR
PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits), or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
o o o o o
B-20
FIRST TRUST EXCHANGE-TRADED FUND
PART C - OTHER INFORMATION
ITEM 28. EXHIBITS
EXHIBIT NO. DESCRIPTION
(a) Declaration of Trust of the Registrant. (1)
(b) By-Laws of the Registrant, as amended and restated on September 20,
2010 (15)
(c) (1) Establishment and Designation of Series dated June 10, 2005. (1)
(2) Amended and Restated Establishment and Designation of Series
dated April 25, 2014. (17)
(d) (1) Investment Management Agreement dated December 6, 2010. (15)
(2) Expense Reimbursement, Fee Waiver and Recovery Agreement dated
December 6, 2010. (15)
(3) Amendment to Schedule A of the Investment Management
Agreement. (16)
(e) (1) Distribution Agreement dated October 12, 2010. (15)
(2) Amendment to Exhibit A of the Distribution Agreement. (16)
(f) Not Applicable.
(g) (1) Custody Agreement between the Registrant and The Bank of New
York. (2)
(2) Amendment to Schedule II of the Custody Agreement. (16)
(h) (1) Transfer Agency Agreement between the Registrant and The Bank
of New York. (2)
(2) Administration and Accounting Agreement between the Registrant
and The Bank of New York. (2)
(3) Subscription Agreement. (2)
(4) Sublicense Agreement by and among the First Trust
Morningstar(R) Dividend Leaders(SM) Index Fund, Morningstar,
Inc. and First Trust Advisors L.P. dated March 14, 2006. (3)
(5) Sublicense Agreement by and among the First Trust IPOX-100
Index Fund, IPOX Schuster LLC and First Trust Advisors L.P.
dated April 5, 2006. (4)
(6) Sublicense Agreement by and between the First Trust NASDAQ-100
Equal Weighted Index(SM) Fund and First Trust Advisors L.P.
dated April 24, 2006. (5)
(7) Sublicense Agreement by and between the First Trust
NASDAQ-100-Technology Sector Index(SM) Fund and First Trust
Advisors L.P. dated April 24, 2006. (5)
(8) Sublicense Agreement by and among the First Trust Amex(R)
Biotechnology Index Fund, the American Stock Exchange LLC and
First Trust Advisors L.P. dated June 22, 2006. (6)
(9) Sublicense Agreement by and among First Trust Dow Jones
Internet Index(SM) Fund, Dow Jones & Company, Inc. and First
Trust Advisors L.P. dated June 22, 2006. (6)
(10) Form of Participant Agreement with Amendment to Schedule I
attached thereto. (7)
(11) Sublicense Agreement by and among First Trust DB Strategic
Value Index Fund, Deutsche Bank AG, London Branch and First
Trust Advisors L.P. dated July 11, 2006. (7)
(12) Sublicense Agreement by and between First Trust Value Line(R)
Equity Allocation Index Fund and First Trust Advisors L.P.
dated October 4, 2006. (8)
(13) Sublicense Agreement by and between First Trust Value Line(R)
Dividend Index Fund and First Trust Advisors L.P. dated
October 4, 2006. (8)
(14) Sublicense Agreement by and between First Trust NASDAQ(R)
Clean Edge(R) U.S. Liquid Series Index Fund and First Trust
Advisors L.P. dated February 7, 2007. (9)
(15) Sublicense Agreement by and between First Trust NASDAQ-100
Ex-Technology Sector Index(SM) Fund and First Trust Advisors
L.P. dated February 7, 2007. (9)
(16) Sublicense Agreement by and between First Trust Value Line(R)
100 Exchange-Traded Fund and First Trust Advisors L.P. dated
February 4, 2007. (10)
(17) Board Administration Services Agreement among PFPC, Inc.,
First Trust Exchange-Traded Fund and First Trust
Exchange-Traded AlphaDEX(TM) Fund dated as of February 15,
2007. (11)
(18) Sublicense Agreement by and between First Trust S&P REIT Index
Fund and First Trust Advisors L.P. dated April 26, 2007. (11)
(19) Sublicense Agreement by and between First Trust ISE Chindia
Index Fund, International Securities Exchange, LLC and First
Trust Advisors L.P. dated April 25, 2007. (12)
(20) Sublicense Agreement by and between First Trust ISE-Revere
Natural Gas Index Fund, International Securities Exchange, LLC
and First Trust Advisors L.P. dated April 25, 2007. (12)
(21) Sublicense Agreement by and between First Trust ISE Water
Index Fund, International Securities Exchange, LLC and First
Trust Advisors L.P. dated April 25, 2007. (12)
(22) Sublicense Agreement by and between First Trust NASDAQ(R) ABA
Community Bank Index Fund and First Trust Advisors L.P. dated
June 31, 2009. (14)
(23) Sublicense Agreement by and between First Trust Strategic
Value Index Fund and First Trust Advisors L.P. dated June 21,
2010. (15)
(24) Sublicense Agreement by and between First Trust CBOE VIX Tail
Hedge Fund and First Trust Advisors L.P. (16)
(25) Amendment to Exhibit A of the Administration and Accounting
Agreement. (16)
(26) Amendment to Exhibit A of the Transfer Agency Agreement. (16)
(i) Not Applicable.
(j) Consent of Independent Registered Public Accounting Firm. (17) (k)
Not Applicable.
(l) Not Applicable.
(m) (1) 12b-1 Service Plan. (2)
(2) Amendment to Exhibit A of the 12b-1 Service Plan. (16)
(3) Letter Agreement regarding 12b-1 fees, dated March 16,
2014. (17)
(n) Not Applicable.
(o) Not Applicable.
(p) (1) First Trust Advisors L.P., First Trust Portfolios L.P. Code of
Ethics, amended on July 1, 2013. (17)
(2) First Trust Funds Code of Ethics, amended on October 30,
2013. (17)
(q) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec, Keith and
Nielson authorizing James A. Bowen, W. Scott Jardine and Eric F.
Fess to execute the Registration Statement. (13)
------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on June 13, 2005.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on September 26, 2005.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on March 15, 2006.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on April 13, 2006.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on April 25, 2006.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on June 23, 2006.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on July 11, 2006.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on October 13, 2006.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on February 14, 2007.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on March 21, 2007.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on April 27, 2007.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on May 11, 2007.
(13) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on June 25, 2009.
(14) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on May 3, 2010).
(15) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on April 27, 2011.
(16) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on August 16, 2012.
(17) Filed herewith.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 30. INDEMNIFICATION
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
Section 5.3. Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:
(i) every person who is or has been a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified
by the Trust against all liability and against all expenses reasonably
incurred or paid by him or her in connection with any claim, action, suit
or proceeding in which that individual becomes involved as a party or
otherwise by virtue of being or having been a Trustee or officer and
against amounts paid or incurred by that individual in the settlement
thereof;
(ii) the words "claim," "action," "suit" or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and the
words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement or
compromise, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) against any liability to the Trust or the Shareholders by reason
of a final adjudication by the court or other body before which the
proceeding was brought that the Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of that individual's office;
(ii) with respect to any matter as to which the Covered Person shall
have been finally adjudicated not to have acted in good faith in the
reasonable belief that that individual's action was in the best interest
of the Trust; or
(iii) in the event of a settlement involving a payment by a Trustee
or officer or other disposition not involving a final adjudication as
provided in paragraph (b)(i) or (b)(ii) above resulting in a payment by a
Covered Person, unless there has been either a determination that such
Covered Person did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
that individual's office by the court or other body approving the
settlement or other disposition or by a reasonable determination, based
upon a review of readily available facts (as opposed to a full trial-type
inquiry) that that individual did not engage in such conduct:
(A) by vote of a majority of the Disinterested Trustees (as
defined below) acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(B) by written opinion of (i) the then-current legal counsel
to the Trustees who are not Interested Persons of the Trust or (ii)
other legal counsel chosen by a majority of the Disinterested
Trustees (or if there are no Disinterested Trustees with respect to
the matter in question, by a majority of the Trustees who are not
Interested Persons of the Trust) and determined by them in their
reasonable judgment to be independent.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
other rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be a Covered Person and shall inure to
the benefit of the heirs, executors and administrators of such person. Nothing
contained herein shall limit the Trust from entering into other insurance
arrangements or affect any rights to indemnification to which Trust personnel,
including Covered Persons, may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the Covered Person to repay
such amount if it is ultimately determined that the Covered Person is not
entitled to indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising
out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or legal counsel meeting the requirement in Section
5.3(b)(iii)(B) above in a written opinion, shall determine, based upon a
review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the Covered Person
ultimately will be found entitled to indemnification.
As used in this Section 5.3 a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
(e) With respect to any such determination or opinion referred to in
clause (b)(iii) above or clause (d)(ii) above, a rebuttable presumption shall be
afforded that the Covered Person has not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office in accordance with pronouncements of the
Commission.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
First Trust Advisors L.P. ("First Trust"), investment adviser to the
Registrant, serves as adviser or sub-adviser to various other open-end and
closed-end management investment companies and is the portfolio supervisor of
certain unit investment trusts. The principal business of certain of First
Trust's principal executive officers involves various activities in connection
with the family of unit investment trusts sponsored by First Trust Portfolios
L.P. ("FTP"). The principal address for all these investment companies, First
Trust, FTP and the persons below is 120 East Liberty Drive, Suite 400, Wheaton,
Illinois 60187.
A description of any business, profession, vocation or employment of a
substantial nature in which the officers of First Trust who serve as officers or
trustees of the Registrant have engaged during the last two years for his or her
account or in the capacity of director, officer, employee, partner or trustee
appears under "Management of the Fund" in the Statement of Additional
Information. Such information for the remaining senior officers of First Trust
appears below:
[Download Table]
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
Andrew S. Roggensack, President Managing Director and President,
First Trust
R. Scott Hall, Managing Director Managing Director, First Trust
Ronald D. McAlister, Managing Director Managing Director, First Trust
David G. McGarel, Chief Investment Officer Managing Director, Senior Vice
and Managing Director President, First Trust
Kathleen Brown, Chief Compliance Officer Chief Compliance Officer and Senior
and Senior Vice President Vice President, First Trust
Brian Wesbury, Chief Economist and Senior Chief Economist and Senior Vice
Vice President President, First Trust
ITEM 32. PRINCIPAL UNDERWRITER
(a) FTP serves as principal underwriter of the shares of the Registrant,
First Trust Exchange-Traded Fund II, First Trust Exchange-Traded AlphaDEX(R)
Fund, First Trust Exchange-Traded AlphaDEX(R) Fund II, First Trust Series Fund
and the First Defined Portfolio Fund LLC. FTP serves as principal underwriter
and depositor of the following investment companies registered as unit
investment trusts: the First Trust Combined Series, FT Series (formerly known as
the First Trust Special Situations Trust), the First Trust Insured Corporate
Trust, the First Trust of Insured Municipal Bonds, and the First Trust GNMA. The
name of each director, officer and partner of FTP is provided below.
(b) Positions and Offices with Underwriter.
[Enlarge/Download Table]
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
The Charger Corporation General Partner None
Grace Partners of DuPage L.P. Limited Partner None
James A. Bowen Chief Executive Officer and Trustee and Chairman of the Board
Managing Director
Mark R. Bradley Chief Financial Officer, Chief President and Chief Executive
Operating Officer and Managing Officer
Director
Frank L. Fichera Managing Director None
Russell J. Graham Managing Director None
R. Scott Hall Managing Director None
W. Scott Jardine General Counsel, Secretary and Secretary
Managing Director
Daniel J. Lindquist Managing Director Vice President
Ronald D. McAlister Managing Director None
David G. McGarel Managing Director None
Richard A. Olson Managing Director None
Marisa Prestigiacomo Managing Director None
Andrew S. Roggensack President and Managing Director None
Kristi A. Maher Deputy General Counsel Chief Compliance Officer and
Assistant Secretary
* All addresses are
120 East Liberty Drive,
Wheaton, Illinois 60187.
(c) Not Applicable.
ITEM 33. LOCATION OF ACCOUNTS AND RECORDS
First Trust, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187,
maintains the Registrant's organizational documents, minutes of meetings,
contracts of the Registrant and all advisory material of the investment adviser.
The Bank of New York Mellon Corporation ("BONY"), 101 Barclay Street, New
York, New York 10286, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
requirement records not maintained by First Trust.
BONY also maintains all the required records in its capacity as transfer,
accounting, dividend payment and interest holder service agent for the
Registrant.
ITEM 34. MANAGEMENT SERVICES
Not Applicable.
ITEM 35. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement under rule
485(b) under the Securities Act and has duly caused this Registration Statement
to be signed on its behalf by the undersigned, duly authorized, in the City of
Wheaton, and State of Illinois, on the 30th day of April, 2014.
FIRST TRUST EXCHANGE-TRADED FUND
By: /s/ Mark R. Bradley
----------------------------------
Mark R. Bradley, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
SIGNATURE TITLE DATE
President and Chief Executive April 30, 2014
/s/ Mark R. Bradley Officer
---------------------------
Mark R. Bradley
Treasurer, Chief Financial Officer April 30, 2014
/s/ James M. Dykas and Chief Accounting Officer
---------------------------
James M. Dykas
)
James A. Bowen* Trustee )
)
)
Richard E. Erickson* Trustee )
)
) BY: /s/ W. Scott Jardine
Thomas R. Kadlec* Trustee ) -----------------------
) W. Scott Jardine
) Attorney-In-Fact
Robert F. Keith* Trustee ) April 30, 2014
)
)
)
Niel B. Nielson * Trustee )
)
* Original powers of attorney authorizing James A. Bowen, W. Scott Jardine
and Eric F. Fess, to execute Registrant's Registration Statement, and
Amendments thereto, for each of the trustees of the Registrant on whose
behalf this Registration Statement is filed, are incorporated by reference
herein.
INDEX TO EXHIBITS
(c)(2) Amended and Restated Establishment and Designation of Series dated April
25, 2014.
(j) Consent of Independent Registered Public Accounting Firm.
(m)(3) Letter Agreement regarding 12b-1 fees, dated March 16, 2014.
(p)(1) First Trust Advisors L.P., First Trust Portfolios L.P. Code of Ethics,
amended on July 1, 2013.
(p)(2) First Trust Funds Code of Ethics, amended on October 30, 2013.
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘485BXT’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/31/16 | | 93 | | 241 |
| | 4/30/15 | | 5 | | 221 |
| | 6/30/14 | | 89 | | 241 | | | N-CSRS, N-PX, NSAR-A |
| | 5/1/14 | | 1 | | 159 | | | 497J, 497K |
| Filed on: | | 4/30/14 | | 1 | | 279 |
| | 4/25/14 | | 278 | | 280 |
| | 3/31/14 | | 6 | | 208 | | | N-Q |
| | 3/16/14 | | 278 | | 280 |
| | 2/27/14 | | 161 | | | | | NSAR-B |
| | 1/31/14 | | 205 |
| | 1/1/14 | | 202 | | 205 |
| | 12/31/13 | | 7 | | 245 | | | 24F-2NT, DEF 14A, N-CSR, NSAR-B, PRE 14A |
| | 12/19/13 | | 257 |
| | 10/30/13 | | 278 | | 280 |
| | 7/1/13 | | 278 | | 280 |
| | 6/30/13 | | 11 | | | | | N-CSRS, N-PX, NSAR-A |
| | 6/4/13 | | 7 | | 222 |
| | 3/31/13 | | 11 | | | | | N-Q |
| | 3/20/13 | | 6 | | 132 |
| | 12/31/12 | | 172 | | 221 | | | 24F-2NT, N-CSR, NSAR-B |
| | 8/29/12 | | 213 | | 219 | | | NSAR-A |
| | 8/16/12 | | 278 |
| | 3/31/12 | | 72 | | | | | N-Q |
| | 12/31/11 | | 54 | | 221 | | | 24F-2NT, N-CSR, NSAR-B |
| | 9/30/11 | | 19 | | 63 | | | N-Q |
| | 4/27/11 | | 278 | | | | | 485BPOS |
| | 12/6/10 | | 278 |
| | 10/12/10 | | 278 |
| | 9/30/10 | | 16 | | | | | N-Q |
| | 9/20/10 | | 278 |
| | 6/21/10 | | 278 |
| | 6/19/10 | | 7 |
| | 6/18/10 | | 8 | | 180 | | | 497, 497K |
| | 5/3/10 | | 278 | | | | | 485BPOS, 497J, 497K |
| | 9/30/09 | | 46 | | 84 | | | N-Q |
| | 6/30/09 | | 7 | | 80 | | | N-CSRS, N-PX, NSAR-A |
| | 6/25/09 | | 278 | | | | | 485APOS |
| | 6/8/09 | | 99 | | 187 |
| | 3/31/09 | | 38 | | 120 | | | N-Q |
| | 12/31/08 | | 7 | | 84 | | | 24F-2NT, N-CSR, NSAR-B |
| | 11/6/08 | | 67 | | 167 | | | 497 |
| | 6/30/08 | | 29 | | 136 | | | N-CSRS, N-PX, NSAR-A |
| | 3/31/08 | | 24 | | | | | N-Q |
| | 6/18/07 | | 76 | | | | | 25-NSE, 425, 485BPOS |
| | 6/15/07 | | 77 | | 137 | | | 425 |
| | 5/11/07 | | 278 | | | | | 485BPOS |
| | 4/27/07 | | 278 | | | | | 485BPOS |
| | 4/26/07 | | 278 | | | | | 485BXT |
| | 4/25/07 | | 278 |
| | 4/3/07 | | 22 |
| | 3/21/07 | | 278 | | | | | 24F-2NT, 485BPOS, N-14/A |
| | 2/15/07 | | 278 |
| | 2/14/07 | | 278 | | | | | 485BPOS |
| | 2/7/07 | | 278 | | | | | 485APOS |
| | 2/4/07 | | 278 |
| | 1/16/07 | | 75 | | 137 |
| | 12/18/06 | | 80 | | | | | 25-NSE, 485BPOS |
| | 12/15/06 | | 81 | | 138 |
| | 11/20/06 | | 32 |
| | 11/17/06 | | 57 | | 117 |
| | 10/13/06 | | 278 | | | | | 485APOS, N-14/A |
| | 10/4/06 | | 27 | | 278 |
| | 7/11/06 | | 278 | | | | | 485BPOS |
| | 7/3/06 | | 79 | | 138 |
| | 6/23/06 | | 278 | | | | | 485BPOS |
| | 6/22/06 | | 278 |
| | 5/1/06 | | 83 | | 125 |
| | 4/25/06 | | 278 | | | | | 485BPOS |
| | 4/24/06 | | 278 |
| | 4/13/06 | | 278 | | | | | 485BPOS |
| | 4/5/06 | | 278 | | | | | 8-A12B |
| | 3/15/06 | | 278 | | | | | 485APOS, 485BPOS |
| | 3/14/06 | | 278 |
| | 2/22/06 | | 45 | | 114 |
| | 9/26/05 | | 278 | | | | | 485APOS |
| | 6/20/05 | | 41 | | 110 |
| | 6/13/05 | | 278 | | | | | N-1A, N-8A |
| | 6/10/05 | | 278 |
| | 5/3/04 | | 104 |
| | 1/1/04 | | 108 | | 115 |
| | 8/19/03 | | 80 | | 138 |
| | 8/8/03 | | 162 |
| | 6/12/03 | | 76 | | 137 |
| | 6/30/98 | | 103 |
| | 6/30/97 | | 37 | | 108 |
| | 8/31/92 | | 18 | | 104 |
| | 4/1/92 | | 62 |
| List all Filings |
22 Subsequent Filings that Reference this Filing
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