FIRST TRUST
First Trust Exchange-Traded Fund II
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Book 2
First Trust Nasdaq Lux Digital Health Solutions ETF (EKG)
First Trust Indxx Metaverse ETF (ARVR)
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Annual Report
September 30, 2022
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TABLE OF CONTENTS
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FIRST TRUST EXCHANGE-TRADED FUND II
ANNUAL REPORT
SEPTEMBER 30, 2022
Shareholder Letter ......................................................... 2
Market Overview ............................................................ 3
Fund Performance Overview
First Trust Nasdaq Lux Digital Health Solutions ETF (EKG) ............ 4
First Trust Indxx Metaverse ETF (ARVR) ............................... 6
Notes to Fund Performance Overview ......................................... 8
Understanding Your Fund Expenses ........................................... 9
Portfolio of Investments
First Trust Nasdaq Lux Digital Health Solutions ETF (EKG) ............ 10
First Trust Indxx Metaverse ETF (ARVR) ............................... 12
Statements of Assets and Liabilities ....................................... 14
Statements of Operations ................................................... 15
Statements of Changes in Net Assets ........................................ 16
Financial Highlights ....................................................... 17
Notes to Financial Statements .............................................. 18
Report of Independent Registered Public Accounting Firm .................... 24
Additional Information ..................................................... 25
Board of Trustees and Officers ............................................. 30
Privacy Policy ............................................................. 32
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
any series of First Trust Exchange-Traded Fund II (the "Trust") described in
this report (each such series is referred to as a "Fund" and collectively, as
the "Funds") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that any Fund described in this report will achieve its
investment objective. Each Fund is subject to market risk, which is the
possibility that the market values of securities owned by the Fund will decline
and that the value of the Fund's shares may therefore be less than what you paid
for them. Accordingly, you can lose money by investing in a Fund. See "Risk
Considerations" in the Additional Information section of this report for a
discussion of certain other risks of investing in the Funds.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
www.ftportfolios.com or speak with your financial advisor. Investment returns,
net asset value and share price will fluctuate and Fund shares, when sold, may
be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on each Fund's webpage at www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about each Fund and presents data and analysis that provide
insight into each Fund's performance and investment approach.
By reading the market overview by Robert F. Carey, Chief Market Strategist of
the Advisor, you may obtain an understanding of how the market environment
affected the performance of each Fund. The statistical information that follows
may help you understand each Fund's performance compared to that of relevant
market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in each
Fund are spelled out in its prospectus, statement of additional information, and
other Fund regulatory filings.
Page 1
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SHAREHOLDER LETTER
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FIRST TRUST EXCHANGE-TRADED FUND II
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
SEPTEMBER 30, 2022
Dear Shareholders,
First Trust is pleased to provide you with the annual report for certain series
of the First Trust Exchange-Traded Fund II (the "Funds"), which contains
detailed information about the Funds for the twelve months ended September 30,
2022. Please note that the Funds in this report were incepted after October 1,
2021, the start of the reporting period, so information in this letter and the
report prior to each Fund's inception date does not apply to the Funds.
It is times like these that really test the mettle of investors. Are you someone
that is implementing an investment plan with a long time horizon, a trader by
nature, or do you fall somewhere in between? Frankly, the current climate is
challenging for just about any strategy. While most investors are accustomed to
dealing with high levels of volatility in the stock market, some of the daily
swings we have witnessed lately have not only been uncharacteristically sharp
but have occasionally seemed nearly inexplicable, in my opinion.
In case you have not noticed, volatility is also elevated in the fixed-income
market. Bond valuations are down big in 2022. Year-to-date through October 31,
2022, the ICE BofA 15+ Year U.S. Treasury Index experienced a price decline of
33.51%, according to Bloomberg. It was down 31.87% on a total return basis,
which includes reinvested interest. To put this into perspective, over the past
40 years, the worst annual showing by the U.S. Long-Term Government Bond Index
(20-Year) tracked by Morningstar was the -14.90% total return posted in 2009
(think 2008-2009 global financial crisis). For those who may be unaware,
investors benefitted from a trend of declining bond yields from September 1981
through August 2020. While that is an incredible run, nothing lasts forever.
Suffice it to say, a lot of pain has been endured by investors in the markets
this year and we believe there could be more to come in the near-term. The
aggressive interest rate hikes by the Federal Reserve (the "Fed") are a signal
to the markets that it is behind the inflation curve. Moving forward, the Fed
will be looking to lower inflation while simultaneously engineering a soft
landing in the economy. That will be easier said than done, in my opinion.
There are far more headwinds challenging the securities markets than tailwinds.
Here are just a few of those headwinds: stubbornly high inflation; additional
rate hikes expected from the Fed from their November and December 2022 meetings,
which could potentially push bond yields higher; the ongoing war between Russia
and Ukraine, which is impacting the supply and prices of crude oil and natural
gas; China enforcing a zero-tolerance policy to combat the spread of the
coronavirus by locking down entire cities to its own economic detriment; and the
potential for food and energy shortages this coming winter. With the housing
market looking like it is finally cooling off, due largely to a huge spike in
mortgage rates this year, which were up more than double the rate at the start
of the year, the last big tailwind standing may just be the strong U.S. labor
market. If the job market can hang in there, the Fed's goal of a soft landing
for the economy may be attainable. I think we will have a clearer picture of
things at the start of 2023.
Year-to-date through October 31, 2022, the S&P 500(R) Index (the "Index") posted
a total return of -17.70%, according to Bloomberg, which puts the Index in bear
market territory. A bear market is defined as a 20% or greater decline in the
price of a security or index from its most recent peak. While the 17.70% decline
in the Index would technically qualify as a stock market correction, investors
should continue to view the current downturn as a bear market, in my opinion.
Keep in mind, since World War II, there have been 12 bear markets in the Index,
excluding the current bear market, according to Yardeni Research. The average
price decline of those 12 bear markets was 33.6%. The average price gain over
the 12-months following the trough reached during those bear markets was 40.8%,
according to Bloomberg. Bear markets come and go. You can't catch the turn if
you are not in the market when the turn comes.
Thank you for giving First Trust the opportunity to play a role in your
financial future. We value our relationship with you and will report on the
Funds again in six months.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 2
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MARKET OVERVIEW
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FIRST TRUST EXCHANGE-TRADED FUND II
ANNUAL REPORT
SEPTEMBER 30, 2022
ROBERT F. CAREY, CFA
SENIOR VICE PRESIDENT AND CHIEF MARKET STRATEGIST
FIRST TRUST ADVISORS L.P.
Mr. Carey is responsible for the overall management of research and analysis of
the First Trust product line. Mr. Carey has more than 30 years of experience as
an Equity and Fixed-Income Analyst and is a recipient of the Chartered Financial
Analyst ("CFA") designation. He is a graduate of the University of Illinois at
Champaign-Urbana with a B.S. in Physics. He is also a member of the Investment
Analysts Society of Chicago and the CFA Institute. Mr. Carey has appeared as a
guest on such programs as Bloomberg TV, CNBC, and WBBM Radio, and has been
quoted by several publications, including The Wall Street Journal, The Wall
Street Reporter, Bloomberg News Service and Registered Rep.
STATE OF THE GLOBAL ECONOMY
The International Monetary Fund ("IMF") reported in its October 2022 release
that global gross domestic product ("GDP") growth is expected to come in at 3.2%
in 2022 and 2.7% in 2023, down from 6.0% in 2021. The IMF sees the U.S. economy
growing 1.6% in 2022 and 1.0% in 2023, down from 5.7% in 2021. With respect to
all Advanced Economies, the IMF is projecting GDP growth of 2.4% in 2022 and
1.1% in 2023, down from 5.2% in 2021. Lastly, it sees Emerging Markets and
Developing Economies growing 3.7% in 2022 and 3.7% again in 2023, down from 6.6%
in 2021. From 1970 to 2021, the average global GDP growth rate was 3.6%,
according to the IMF. Looking ahead, the IMF notes that the global economy must
navigate three key pressures: the war in Ukraine, world-wide inflation and
continued economic headwinds in the U.S., Europe and China.
Russia's war with Ukraine continues to destabilize the global economy,
increasing the cost of living and impeding economic growth. European natural gas
prices have spiked four-fold since 2021, according to the IMF. Russia has
decreased natural gas deliveries to Europe by over 80% of their 2021 total,
greatly increasing the likelihood of an energy shortage. Worldwide inflationary
pressures continue to fester, with global inflation forecast to surge to 8.8% in
2022, up from 4.7% in 2021. Central banks have rapidly tightened monetary policy
in response, and will likely have to continue to do so, in our opinion. These
tighter financial conditions have produced significant headwinds to growth among
most major economies and are likely to have at least some impact in 2023.
PERFORMANCE OF GLOBAL STOCKS AND BONDS
U.S. equities have turned negative over the past year. The S&P 500(R) (the
"Index"), S&P MidCap 400(R) and S&P SmallCap 600(R) Indices posted total returns
of -15.47%, -15.25% and -18.83%, respectively, for the 12-month period ended
September 30, 2022, according to Bloomberg. Value stocks outperformed growth
stocks over the period. The S&P 500(R) Value Index posted a total return of
-9.63% versus -21.11% for the S&P 500(R) Growth Index; an indication that
investors may be anticipating slower growth over the near-term and are opting
for companies that are trading at more attractive valuations. Nine of the eleven
sectors that comprise the Index were down on a total return basis, with Energy
and Utilities posting the only positive returns. The top-performer was Energy,
up 45.70%, while the worst showing came from Communication Services, down
39.05%.
A Bloomberg survey of 23 equity strategists found that the average 2022 year-end
price target for the Index was 4,346 as of September 15, 2022, down from 4,376
on August 16, 2022, according to its own release. Heading into 2022 (December
16, 2021), strategists had an average target of 4,950. The highest and lowest
estimates on September 15, 2022, were 5,100 and 3,400, respectively. On
September 15, 2022, the Index closed at 3,901.35, which was 18.66% below its
all-time closing high of 4,796.56 on January 3, 2022. As of September 30, 2022,
Bloomberg's 2022, 2023 and 2024 consensus earnings growth rate estimates for the
Index stood at 9.61%, 6.14% and 8.44%, respectively.
The performance of foreign equities continues to lag that of major U.S. stock
indices. Over the past 12 months, the MSCI World ex USA and MSCI Emerging
Markets equity indices posted total returns of -23.91% (USD) and -28.11% (USD),
respectively, according to Bloomberg. Major foreign bond indices were also in
negative territory. The Bloomberg Global Aggregate Index of higher quality debt
posted a total return of -20.43% (USD), while the EM Hard Currency Aggregate
Index of emerging markets debt fell by 23.01% (USD), according to Bloomberg.
Over that same period, the U.S. dollar surged by 18.98% against a basket of
major currencies, as measured by the U.S. Dollar Index (DXY), pressuring the
returns on unhedged foreign securities held by U.S. investors.
U.S. bond indices have not been immune to the aggressive tightening of monetary
policy by central banks, particularly the U.S. Federal Reserve. The best
performing index we track was the U.S. Treasury: Intermediate Index, which
posted a total return of -9.23% for the 12-month period ended September 30,
2022. The worst performer was the U.S. Corporate Investment Grade Index which
posted a total return of -18.53% for the same period. The yield on the benchmark
10-Year Treasury Note ("T-Note") rose by 234 basis points (a 157.47% increase
over the period) to close at 3.83% on September 30, 2022, according to
Bloomberg. For comparative purposes, the average yield on the 10-Year T-Note was
2.10% for the 10-year period ended September 30, 2022.
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST NASDAQ LUX DIGITAL HEALTH SOLUTIONS ETF (EKG)
The First Trust Nasdaq Lux Digital Health Solutions 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 Nasdaq Lux Health Tech
Index (the "Index"). The shares of the Fund are listed and trade on The Nasdaq
Stock Market LLC under the ticker symbol "EKG." The Fund will normally invest at
least 80% of its net assets (plus any borrowings for investment purposes) in the
common stocks and depositary receipts that comprise the Index. The Index is
developed, maintained and sponsored by Nasdaq, Inc. the ("Index Provider").
According to the Index Provider, the Index is designed to measure the
performance of a selection of companies that are primarily engaged in and
involved at the intersection of healthcare and technology, as classified by Lux
Capital based on analysis of the products and services offered by those
companies.
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PERFORMANCE
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CUMULATIVE
TOTAL RETURNS
Inception
(3/22/22)
to 9/30/22
FUND PERFORMANCE
NAV -30.68%
Market Price -30.58%
INDEX PERFORMANCE
Nasdaq Lux Health Tech Index -30.48%
S&P Composite 1500 Health Care Index -11.01%
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(See Notes to Fund Performance Overview on page 8.)
PERFORMANCE REVIEW
The Fund generated a net asset value ("NAV") return of -30.68% during the period
from the Fund's inception on March 22, 2022 through September 30, 2022. During
the same period, the S&P Composite 1500 Health Care Index (the "Benchmark")
generated a return of -11.01%. The greatest allocation in the Fund during the
period was to securities in the Health Care Equipment & Supplies industry. This
industry carried an average weight of 52.1% and accounted for -13.3% to the
Fund's overall return, the most significant negative contribution to return of
any industry during the period. The next greatest allocation during the period
was to the Life Sciences Tools & Services industry, which received an allocation
of 25.1% and contributed -8.1% to the Fund's overall return. No invested
industry had a positive contribution to the Fund's return during the time period
covered by this report.
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Nasdaq(R) and Nasdaq Lux Health Tech Index are registered trademarks and service
marks of Nasdaq, Inc. (together with its affiliates hereinafter referred to as
the "Corporations") and are licensed for use by First Trust. The Fund has not
been passed on by the Corporations as to its legality or suitability. The Fund
is not issued, endorsed, sold or promoted by the Corporations. THE CORPORATIONS
MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE FUND.
Page 4
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST NASDAQ LUX DIGITAL HEALTH SOLUTIONS ETF (EKG) (CONTINUED)
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% OF TOTAL
SECTOR CLASSIFICATION LONG-TERM INVESTMENTS
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Health Care 100.0%
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Total 100.0%
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% OF TOTAL
TOP TEN HOLDINGS LONG-TERM INVESTMENTS
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ResMed, Inc. 8.6%
Dexcom, Inc. 8.5
Illumina, Inc. 8.2
Intuitive Surgical, Inc. 7.9
IQVIA Holdings, Inc. 7.4
Hologic, Inc. 4.2
ABIOMED, Inc. 4.1
QIAGEN N.V. 4.0
Insulet Corp. 3.9
Align Technology, Inc. 3.7
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Total 60.5%
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
MARCH 22, 2022 - SEPTEMBER 30, 2022
First Trust Nasdaq Nasdaq Lux
Lux Digital Health Health Tech S&P Composite 1500
Solutions ETF Index Health Care Index
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3/22/22 $10,000 $10,000 $10,000
3/31/22 10,210 10,214 10,025
9/30/22 6,932 6,952 8,899
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
Information showing the number of days the market price of the Fund's shares was
greater (at a premium) and less (at a discount) than the Fund's net asset value
for the most recently completed year, and the most recently completed calendar
quarters since that year (or life of the Fund, if shorter) is available at
https://www.ftportfolios.com/Retail/etf/home.aspx.
Page 5
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST INDXX METAVERSE ETF (ARVR)
The First Trust Indxx Metaverse 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 Indxx Metaverse Index (the "Index"). The
shares of the Fund are listed and trade on The Nasdaq Stock Market LLC under the
ticker symbol "ARVR." The Fund will normally invest at least 80% of its net
assets (plus any borrowings for investment purposes) in the common stocks and
depositary receipts that comprise the Index. The Index is developed, maintained
and sponsored by Indxx, Inc. (the "Index Provider"). The Index Provider is not
affiliated with the Fund, the Fund's investment advisor or the Fund's
distributor. The Index is a rules-based index, however, the Index Provider
reserves the right to use qualitative judgment to include, exclude, adjust, or
postpone the inclusion of a stock in the Index.
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PERFORMANCE
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CUMULATIVE
TOTAL RETURNS
Inception
(4/19/22)
to 9/30/22
FUND PERFORMANCE
NAV -26.05%
Market Price -25.82%
INDEX PERFORMANCE
Indxx Metaverse Index -25.67%
MSCI ACWI Index -19.52%
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(See Notes to Fund Performance Overview on page 8.)
PERFORMANCE REVIEW
The Fund generated a NAV return of -26.05% during the period from the Fund's
inception on April 19, 2022 through September 30, 2022. During the same period,
the MSCI ACWI Index (the "Benchmark") generated a return of -19.52%. Over the
same period, the Fund was most heavily weighted towards the Entertainment
industry. This industry received an allocation of 31.7% and contributed 0.6% to
the Fund's overall return. The Semiconductors & Semiconductor Equipment industry
was weighted at 29.2% and contributed -7.9% to the Fund's overall return, which
was the most negative contribution of any industry. No industry contributed
positively to the Fund's total return during the period. The Fund's currency
exposure caused -2.7% of underperformance during the same period.
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Indxx and Indxx Metaverse Index ("Index") are trademarks of Indxx, Inc.
("Indxx") and have been licensed for use for certain purposes by First Trust.
The Fund is not sponsored, endorsed, sold or promoted by Indxx and Indxx makes
no representation regarding the advisability of trading in such product. The
Index is determined, composed and calculated by Indxx without regard to First
Trust or the Fund.
Page 6
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST INDXX METAVERSE ETF (ARVR) (CONTINUED)
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% OF TOTAL
SECTOR CLASSIFICATION LONG-TERM INVESTMENTS
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Information Technology 56.5%
Communication Services 38.7
Consumer Discretionary 2.9
Industrials 1.0
Health Care 0.9
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Total 100.0%
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% OF TOTAL
TOP TEN HOLDINGS LONG-TERM INVESTMENTS
-----------------------------------------------------------
Netflix, Inc. 4.5%
Microchip Technology, Inc. 3.7
Amphenol Corp., Class A 3.7
STMicroelectronics N.V. 3.6
Texas Instruments, Inc. 3.6
Synopsys, Inc. 3.4
Nintendo Co., Ltd. 3.4
Apple, Inc. 3.4
Electronic Arts, Inc. 3.3
ROBLOX Corp., Class A 3.3
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Total 35.9%
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
APRIL 19, 2022 - SEPTEMBER 30, 2022
First Trust Indxx Indxx Metaverse MSCI ACWI
Metaverse ETF Index Index
---------------------- --------------- ---------------
4/19/22 $10,000 $10,000 $10,000
9/30/22 7,395 7,433 8,048
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
Information showing the number of days the market price of the Fund's shares was
greater (at a premium) and less (at a discount) than the Fund's net asset value
for the most recently completed year, and the most recently completed calendar
quarters since that year (or life of the Fund, if shorter) is available at
https://www.ftportfolios.com/Retail/etf/home.aspx.
Page 7
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NOTES TO FUND PERFORMANCE OVERVIEW (UNAUDITED)
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Total returns for the period since inception are calculated from the inception
date of each Fund. "Cumulative Total Returns" represent the total change in
value of an investment over the period indicated.
Each Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint of the national best bid and offer price ("NBBO") as of
the time that the Fund's NAV is calculated. Under SEC rules, the NBBO consists
of the highest displayed buy and lowest sell prices among the various exchanges
trading the Fund at the time the Fund's NAV is calculated. Since shares of each
Fund did not trade in the secondary market until after the Fund's inception, for
the period from inception to the first day of secondary market trading in shares
of the Fund, the NAV of each Fund is used as a proxy for the secondary market
trading price to calculate market returns. NAV and market returns assume that
all distributions have been reinvested in each Fund at NAV and Market Price,
respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike each Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by each 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 presented reflect the reinvestment of dividends on
securities in the indices. 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. The investment return and principal value of shares of each
Fund will vary with changes in market conditions. Shares of each Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. Each Fund's past performance is no guarantee of future performance.
Page 8
FIRST TRUST EXCHANGE-TRADED FUND II
UNDERSTANDING YOUR FUND EXPENSES
SEPTEMBER 30, 2022 (UNAUDITED)
As a shareholder of First Trust Nasdaq Lux Digital Health Solutions ETF or First
Trust Indxx Metaverse ETF (each a "Fund" and collectively, the "Funds"), you
incur two types of costs: (1) transaction costs; and (2) ongoing costs,
including management fees, distribution and/or service (12b-1) fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Funds and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period (or since inception) and held through the six-month (or shorter) period
ended September 30, 2022.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Period"
to estimate the expenses you paid on your account during this six-month (or
shorter) period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on each Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
each Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Funds and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
APRIL 1, 2022 SEPTEMBER 30, 2022 PERIOD PERIOD (a)
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FIRST TRUST NASDAQ LUX DIGITAL HEALTH SOLUTIONS ETF (EKG)
Actual $1,000.00 $ 679.00 0.65% $2.74
Hypothetical (5% return before expenses) $1,000.00 $1,021.81 0.65% $3.29
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ANNUALIZED EXPENSES PAID
EXPENSE RATIO DURING THE PERIOD
BEGINNING ENDING BASED ON THE APRIL 19, 2022 (b)
ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS TO
APRIL 19, 2022 (b) SEPTEMBER 30, 2022 IN THE PERIOD SEPTEMBER 30, 2022 (c)
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FIRST TRUST INDXX METAVERSE ETF (ARVR)
Actual $1,000.00 $ 739.50 0.70% $2.75
Hypothetical (5% return before expenses) $1,000.00 $1,021.56 0.70% $3.55
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (April 1,
2022 through September 30, 2022), multiplied by 183/365 (to reflect the
six-month period).
(b) Inception date.
(c) Actual expenses are equal to the annualized expense ratio as indicated in
the table multiplied by the average account value over the period (April
19, 2022 through September 30, 2022), multiplied by 165/365. Hypothetical
expenses are assumed for the most recent six-month period.
Page 9
FIRST TRUST NASDAQ LUX DIGITAL HEALTH SOLUTIONS ETF (EKG)
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 2022
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
COMMON STOCKS -- 100.0%
BIOTECHNOLOGY -- 6.5%
157 CareDx, Inc. (a) $ 2,672
501 Exact Sciences Corp. (a) 16,278
228 Myriad Genetics, Inc. (a) 4,350
331 Natera, Inc. (a) 14,504
144 Twist Bioscience Corp. (a) 5,075
171 Veracyte, Inc. (a) 2,839
--------------
45,718
--------------
HEALTH CARE EQUIPMENT &
SUPPLIES
-- 56.1%
119 ABIOMED, Inc. (a) 29,234
126 Align Technology, Inc. (a) 26,096
289 Alphatec Holdings, Inc. (a) 2,526
158 Axonics, Inc. (a) 11,130
443 Butterfly Network, Inc. (a) 2,082
749 Dexcom, Inc. (a) 60,324
73 Establishment Labs Holdings,
Inc. (a) 3,987
316 Globus Medical, Inc.,
Class A (a) 18,824
456 Hologic, Inc. (a) 29,421
81 Inspire Medical Systems,
Inc. (a) 14,367
121 Insulet Corp. (a) 27,757
299 Intuitive Surgical, Inc. (a) 56,045
86 iRhythm Technologies, Inc. (a) 10,774
136 Masimo Corp. (a) 19,198
108 Outset Medical, Inc. (a) 1,720
94 Pulmonx Corp. (a) 1,566
130 QuidelOrtho Corp. (a) 9,292
280 ResMed, Inc. 61,124
184 Tandem Diabetes Care, Inc. (a) 8,804
77 TransMedics Group, Inc. (a) 3,214
--------------
397,485
--------------
HEALTH CARE PROVIDERS &
SERVICES
-- 6.2%
182 Accolade, Inc. (a) 2,078
83 Castle Biosciences, Inc. (a) 2,165
1,138 Clover Health Investments
Corp. (a) 1,935
65 Fulgent Genetics, Inc. (a) 2,478
286 Guardant Health, Inc. (a) 15,395
380 Hims & Hers Health, Inc. (a) 2,120
643 Invitae Corp. (a) 1,582
283 LifeStance Health Group,
Inc. (a) 1,873
194 Privia Health Group, Inc. (a) 6,608
207 Progyny, Inc. (a) 7,671
--------------
43,905
--------------
HEALTH CARE TECHNOLOGY -- 8.4%
706 American Well Corp.,
Class A (a) 2,535
130 Definitive Healthcare Corp. (a) 2,020
324 Doximity, Inc., Class A (a) 9,791
288 GoodRx Holdings, Inc.,
Class A (a) 1,345
174 Health Catalyst, Inc. (a) 1,688
178 Schrodinger, Inc. (a) 4,446
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
HEALTH CARE TECHNOLOGY
(CONTINUED)
480 Teladoc Health, Inc. (a) $ 12,168
154 Veeva Systems, Inc.,
Class A (a) 25,392
--------------
59,385
--------------
LIFE SCIENCES TOOLS & SERVICES
-- 22.8%
247 10X Genomics, Inc., Class A (a) 7,034
390 Adaptive Biotechnologies
Corp. (a) 2,777
381 Cytek Biosciences, Inc. (a) 5,608
305 Illumina, Inc. (a) 58,191
290 IQVIA Holdings, Inc. (a) 52,531
365 NeoGenomics, Inc. (a) 3,143
453 Pacific Biosciences of
California, Inc. (a) 2,630
678 QIAGEN N.V. (a) 27,988
557 SomaLogic, Inc. (a) 1,615
--------------
161,517
--------------
TOTAL COMMON STOCKS
-- 100.0% 708,010
(Cost $1,001,825) --------------
MONEY MARKET FUNDS -- 0.1%
791 Morgan Stanley Institutional
Liquidity Funds - Treasury
Portfolio - Institutional
Class - 2.77% (b) 791
(Cost $791) --------------
TOTAL INVESTMENTS -- 100.1% 708,801
(Cost $1,002,616)
NET OTHER ASSETS AND
LIABILITIES -- (0.1)% (407)
--------------
NET ASSETS -- 100.0% $ 708,394
==============
(a) Non-income producing security.
(b) Rate shown reflects yield as of September 30, 2022.
Page 10 See Notes to Financial Statements
FIRST TRUST NASDAQ LUX DIGITAL HEALTH SOLUTIONS ETF (EKG)
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2022
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of September 30,
2022 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
9/30/2022 PRICES INPUTS INPUTS
---------------------------------------------------------------------
Common Stocks*.................................. $ 708,010 $ 708,010 $ -- $ --
Money Market Funds.............................. 791 791 -- --
---------------------------------------------------------------------
Total Investments............................... $ 708,801 $ 708,801 $ -- $ --
=====================================================================
* See Portfolio of Investments for industry breakout.
See Notes to Financial Statements Page 11
FIRST TRUST INDXX METAVERSE ETF (ARVR)
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 2022
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
COMMON STOCKS -- 99.5%
AEROSPACE & DEFENSE -- 1.0%
616 Maxar Technologies, Inc. $ 11,532
--------------
ELECTRONIC EQUIPMENT,
INSTRUMENTS
& COMPONENTS -- 7.4%
607 Amphenol Corp., Class A 40,645
32,308 AUO Corp. (TWD) (a) 14,959
2,802 Sunny Optical Technology
Group Co., Ltd. (HKD) (a) 26,628
--------------
82,232
--------------
ENTERTAINMENT -- 33.3%
616 Capcom Co., Ltd. (JPY) (a) 15,508
1,230 DeNA Co., Ltd. (JPY) (a) 15,583
318 Electronic Arts, Inc. 36,796
882 GungHo Online Entertainment,
Inc. (JPY) (a) 13,547
1,036 Koei Tecmo Holdings Co., Ltd.
(JPY) (a) 17,052
962 Mixi, Inc. (JPY) (a) 15,269
2,242 NetEase, Inc. (HKD) (a) 33,829
211 Netflix, Inc. (b) 49,678
311 Netmarble Corp.
(KRW) (a) (c) (d) 11,026
1,812 Nexon Co., Ltd. (JPY) (a) 32,011
940 Nintendo Co., Ltd. (JPY) (a) 37,910
1,010 ROBLOX Corp., Class A (b) 36,198
310 Square Enix Holdings Co., Ltd.
(JPY) (a) 13,360
315 Take-Two Interactive Software,
Inc. (b) 34,335
375 Ubisoft Entertainment S.A.
(EUR) (a) (b) 10,302
--------------
372,404
--------------
HEALTH CARE TECHNOLOGY -- 0.9%
389 Teladoc Health, Inc. (b) 9,861
--------------
HOUSEHOLD DURABLES -- 2.8%
494 Sony Group Corp. (JPY) (a) 31,818
--------------
INTERACTIVE MEDIA & SERVICES
-- 5.1%
232 Meta Platforms, Inc.,
Class A (b) 31,478
2,643 Snap, Inc., Class A (b) 25,954
--------------
57,432
--------------
IT SERVICES -- 1.4%
606 Keywords Studios PLC (GBP) (a) 15,455
--------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT -- 28.0%
504 Advanced Micro Devices,
Inc. (b) 31,934
1,047 Intel Corp. 26,981
680 Microchip Technology, Inc. 41,501
678 Micron Technology, Inc. 33,968
252 NVIDIA Corp. 30,590
297 QUALCOMM, Inc. 33,555
1,304 STMicroelectronics N.V.
(EUR) (a) 40,518
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT (CONTINUED)
495 Taiwan Semiconductor
Manufacturing Co., Ltd., ADR $ 33,937
258 Texas Instruments, Inc. 39,933
--------------
312,917
--------------
SOFTWARE -- 13.8%
102 Adobe, Inc. (b) 28,070
149 Microsoft Corp. 34,702
125 Synopsys, Inc. (b) 38,189
897 Unity Software, Inc. (b) 28,579
331 Zoom Video Communications,
Inc., Class A (b) 24,358
--------------
153,898
--------------
TECHNOLOGY HARDWARE, STORAGE
& PERIPHERALS -- 5.8%
273 Apple, Inc. 37,728
23,424 Xiaomi Corp., Class B
(HKD) (a) (b) (c) (d) 26,524
--------------
64,252
--------------
TOTAL INVESTMENTS -- 99.5% 1,111,801
(Cost $1,564,441)
NET OTHER ASSETS AND
LIABILITIES -- 0.5% 5,420
--------------
NET ASSETS -- 100.0% $ 1,117,221
==============
(a) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures approved by the Trust's Board of Trustees, and
in accordance with provisions of the Investment Company Act of 1940 and
rules thereunder, as amended. At September 30, 2022, securities noted as
such are valued at $371,299 or 33.2% of net assets. Certain of these
securities are fair valued using a factor provided by a third-party
pricing service due to the change in value between the foreign markets'
close and the New York Stock Exchange close exceeding a certain threshold.
On days when this threshold is not exceeded, these securities are
typically valued at the last sale price on the exchange on which they are
principally traded.
(b) Non-income producing security.
(c) This security is exempt from registration upon resale under Rule 144A of
the Securities Act of 1933, as amended (the "1933 Act") and may be resold
in transactions exempt from registration, normally to qualified
institutional buyers. This security is not restricted on the foreign
exchange where it trades freely without any additional registration. As
such, it does not require the additional disclosure required of restricted
securities.
(d) This security may be resold to qualified foreign investors and foreign
institutional buyers under Regulation S of the 1933 Act.
ADR - American Depositary Receipt
Page 12 See Notes to Financial Statements
FIRST TRUST INDXX METAVERSE ETF (ARVR)
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2022
% OF TOTAL
CURRENCY EXPOSURE DIVERSIFICATION INVESTMENTS
-------------------------------------------------------------
USD 66.6%
JPY 17.3
HKD 7.8
EUR 4.6
GBP 1.4
TWD 1.3
KRW 1.0
------
Total 100.0%
======
Currency Abbreviations:
EUR - Euro
GBP - British Pound Sterling
HKD - Hong Kong Dollar
JPY - Japanese Yen
KRW - South Korean Won
TWD - New Taiwan Dollar
USD - United States Dollar
% OF TOTAL
COUNTRY ALLOCATION* INVESTMENTS
-------------------------------------------------------------
United States 63.5%
Japan 17.3
Cayman Islands 7.8
Taiwan 4.4
Netherlands 3.7
United Kingdom 1.4
South Korea 1.0
France 0.9
------
Total 100.0%
======
* Portfolio securities are categorized based upon their country of
incorporation, which can be different from the country categorization of the
Fund's underlying index.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of September 30,
2022 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
9/30/2022 PRICES INPUTS INPUTS
---------------------------------------------------------------------
Common Stocks:
Electronic Equipment, Instruments &
Components................................. $ 82,232 $ 40,645 $ 41,587 $ --
Entertainment................................. 372,404 157,007 215,397 --
Household Durables............................ 31,818 -- 31,818 --
IT Services................................... 15,455 -- 15,455 --
Semiconductors & Semiconductor Equipment...... 312,917 272,399 40,518 --
Technology Hardware, Storage & Peripherals.... 64,252 37,728 26,524 --
Other Industry Categories*.................... 232,723 232,723 -- --
---------------------------------------------------------------------
Total Investments............................... $ 1,111,801 $ 740,502 $ 371,299 $ --
=====================================================================
* See Portfolio of Investments for industry breakout.
See Notes to Financial Statements Page 13
FIRST TRUST EXCHANGE-TRADED FUND II
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2022
FIRST TRUST
NASDAQ LUX FIRST TRUST
DIGITAL HEALTH INDXX
SOLUTIONS ETF METAVERSE ETF
(EKG) (ARVR)
---------------------- ----------------------
ASSETS:
Investments, at value ................................................. $ 708,801 $ 1,111,801
Cash .................................................................. -- 5,155
Dividends receivable .................................................. -- 1,168
---------------- ----------------
Total Assets ....................................................... 708,801 1,118,124
---------------- ----------------
LIABILITIES:
Investment advisory fees payable ...................................... 407 903
---------------- ----------------
Total Liabilities .................................................. 407 903
---------------- ----------------
NET ASSETS ............................................................ $ 708,394 $ 1,117,221
================ ================
NET ASSETS CONSIST OF:
Paid-in capital ....................................................... $ 1,018,746 $ 1,589,560
Par value ............................................................. 500 500
Accumulated distributable earnings (loss) ............................. (310,852) (472,839)
---------------- ----------------
NET ASSETS ............................................................ $ 708,394 $ 1,117,221
================ ================
NET ASSET VALUE, per share ............................................ $ 14.17 $ 22.34
================ ================
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share) ............................. 50,002 50,002
================ ================
Investments, at cost .................................................. $ 1,002,616 $ 1,564,441
================ ================
Page 14 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND II
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 2022
FIRST TRUST
NASDAQ LUX FIRST TRUST
DIGITAL HEALTH INDXX
SOLUTIONS ETF METAVERSE ETF
(EKG) (a) (ARVR) (b)
---------------------- ----------------------
INVESTMENT INCOME:
Dividends.............................................................. $ 301 $ 11,733
Foreign withholding tax................................................ -- (720)
---------------- ----------------
Total investment income............................................. 301 11,013
---------------- ----------------
EXPENSES:
Investment advisory fees............................................... 5,217 7,892
---------------- ----------------
Total expenses...................................................... 5,217 7,892
---------------- ----------------
NET INVESTMENT INCOME (LOSS)........................................... (4,916) 3,121
---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... (17,037) (21,623)
In-kind redemptions................................................. (237,067) (166,166)
Foreign currency transactions....................................... -- (2,639)
---------------- ----------------
Net realized gain (loss)............................................... (254,104) (190,428)
---------------- ----------------
Net change in unrealized appreciation (depreciation) on:
Investments......................................................... (293,815) (452,640)
Foreign currency translation........................................ -- (1)
---------------- ----------------
Net change in unrealized appreciation (depreciation)................... (293,815) (452,641)
---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ (547,919) (643,069)
---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ (552,835) $ (639,948)
================ ================
(a) Inception date is March 22, 2022, which is consistent with the
commencement of investment operations and is the date the initial creation
units were established.
(b) Inception date is April 19, 2022, which is consistent with the
commencement of investment operations and is the date the initial creation
units were established.
See Notes to Financial Statements Page 15
FIRST TRUST EXCHANGE-TRADED FUND II
STATEMENTS OF CHANGES IN NET ASSETS
FIRST TRUST
NASDAQ LUX FIRST TRUST
DIGITAL HEALTH INDXX
SOLUTIONS ETF METAVERSE ETF
(EKG) (ARVR)
-------------- -------------
PERIOD ENDED PERIOD ENDED
9/30/2022 (a) 9/30/2022 (b)
-------------- -------------
OPERATIONS:
Net investment income (loss)......................................................... $ (4,916) $ 3,121
Net realized gain (loss)............................................................. (254,104) (190,428)
Net change in unrealized appreciation (depreciation)................................. (293,815) (452,641)
-------------- -------------
Net increase (decrease) in net assets resulting from operations...................... (552,835) (639,948)
-------------- -------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold............................................................ 2,043,810 3,024,808
Cost of shares redeemed.............................................................. (782,581) (1,267,639)
-------------- -------------
Net increase (decrease) in net assets resulting from shareholder transactions........ 1,261,229 1,757,169
-------------- -------------
Total increase (decrease) in net assets.............................................. 708,394 1,117,221
NET ASSETS:
Beginning of period.................................................................. -- --
-------------- -------------
End of period........................................................................ $ 708,394 $ 1,117,221
============== =============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period.............................................. -- --
Shares sold.......................................................................... 100,002 100,002
Shares redeemed...................................................................... (50,000) (50,000)
-------------- -------------
Shares outstanding, end of period.................................................... 50,002 50,002
============== =============
(a) Inception date is March 22, 2022, which is consistent with the
commencement of investment operations and is the date the initial creation
units were established.
(b) Inception date is April 19, 2022, which is consistent with the
commencement of investment operations and is the date the initial creation
units were established.
Page 16 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND II
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
FIRST TRUST NASDAQ LUX DIGITAL HEALTH SOLUTIONS ETF (EKG)
PERIOD
ENDED
9/30/2022 (a)
-------------
Net asset value, beginning of period........................... $ 20.44
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................... (0.10)
Net realized and unrealized gain (loss)........................ (6.17)
---------
Total from investment operations............................... (6.27)
---------
Net asset value, end of period................................. $ 14.17
=========
TOTAL RETURN (b)............................................... (30.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................... $ 708
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets.................. 0.65% (c)
Ratio of net investment income (loss) to average net assets.... (0.61)% (c)
Portfolio turnover rate (d).................................... 5%
FIRST TRUST INDXX METAVERSE ETF (ARVR)
PERIOD
ENDED
9/30/2022 (a)
-------------
Net asset value, beginning of period........................... $ 30.21
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................... 0.06
Net realized and unrealized gain (loss)........................ (7.93)
---------
Total from investment operations............................... (7.87)
---------
Net asset value, end of period................................. $ 22.34
=========
TOTAL RETURN (b)............................................... (26.05)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................... $ 1,117
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets.................. 0.70% (c)
Ratio of net investment income (loss) to average net assets.... 0.28% (c)
Portfolio turnover rate (d).................................... 11%
(a) Inception dates for EKG and ARVR are March 22, 2022 and April 19, 2022,
respectively, which are consistent with the respective Fund's commencement
of investment operations and are the dates 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
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does 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.
(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.
See Notes to Financial Statements Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022
1. ORGANIZATION
First Trust Exchange-Traded Fund II (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on July 6, 2006,
and is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eighteen exchange-traded funds. This report
covers the two funds (each a "Fund" and collectively, the "Funds") listed below.
The shares of each Fund are listed and traded on the Nasdaq Stock Market LLC
("Nasdaq").
First Trust Nasdaq Lux Digital Health Solutions ETF - (ticker "EKG")(1)
First Trust Indxx Metaverse ETF - (ticker "ARVR")(2)
(1) Commenced investment operations on March 22, 2022.
(2) Commenced investment operations on April 19, 2022.
Each Fund represents a separate series of shares of beneficial interest in the
Trust. Unlike conventional mutual funds, each Fund issues and redeems shares on
a continuous basis, at net asset value ("NAV"), only in large blocks of shares
known as "Creation Units." The investment objective of each Fund is to seek
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of the following indices:
FUND INDEX
First Trust Nasdaq Lux Digital Health Solutions ETF Nasdaq Lux Health Tech Index
First Trust Indxx Metaverse ETF Indxx Metaverse Index
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds are each considered an investment company and follow accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Funds in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
Each Fund's NAV is determined daily as of the close of regular trading on the
New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day
the NYSE is open for trading. If the NYSE closes early on a valuation day, the
NAV is determined as of that time. Foreign securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
Each Fund's NAV is calculated by dividing the value of all assets of each Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
Each Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent readily available market quotations such as last sale or
official closing prices from a national or foreign exchange (i.e., a regulated
market) and are primarily obtained from third-party pricing services. Fair value
prices represent any prices not considered market value prices and are either
obtained from a third-party pricing service or are determined by the Pricing
Committee of the Funds' investment advisor, First Trust Advisors L.P. ("First
Trust" or the "Advisor"), in accordance with valuation procedures approved by
the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act
and rules thereunder. Investments valued by the Advisor's Pricing Committee, if
any, are footnoted as such in the footnotes to the Portfolio of Investments.
Each Fund's investments are valued as follows:
Common stocks and other equity securities listed on any national or
foreign exchange (excluding Nasdaq and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the primary exchange for such securities.
Securities trading on foreign exchanges or over-the-counter markets that
close prior to the NYSE close may be valued using a systematic fair
valuation model provided by a third-party pricing service. If these
foreign securities meet certain criteria in relation to the valuation
model, their valuation is systematically adjusted to reflect the impact of
movement in the U.S. market after the close of the foreign markets.
Shares of open-end funds are valued based on NAV per share.
Securities traded in an over-the-counter market are valued at the mean of
their most recent bid and asked price, if available, and otherwise at
their last trade price.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Advisor's Pricing Committee 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 Securities Act of 1933, as amended) for which a
third-party pricing service is unable to provide a market price; securities
whose trading has been formally suspended; a security whose market or fair value
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 NAV or make it difficult or impossible to obtain a reliable market
quotation; and a security whose price, as provided by the third-party 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. When
fair value prices are used, generally they will differ from market quotations or
official closing prices on the applicable exchanges. A variety of factors may be
considered in determining the fair value of such securities, including, but not
limited to, the following:
1) the last sale price on the exchange on which they are principally
traded or, for Nasdaq and AIM securities, the official closing
price;
2) the type of security;
3) the size of the holding;
4) the initial cost of the security;
5) transactions in comparable securities;
6) price quotes from dealers and/or third-party pricing services;
7) relationships among various securities;
8) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
9) an analysis of the issuer's financial statements;
10) the existence of merger proposals or tender offers that might affect
the value of the security; and
11) other relevant factors.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund or exchange-traded fund trading of similar
securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur;
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions; and
9) other relevant factors.
In addition, differences between the prices used to calculate a Fund's NAV and
the prices used by such Fund's corresponding index could result in a difference
between a Fund's performance and the performance of its underlying index.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of a Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE. Any use of a different rate from the rates
used by a relevant index may adversely affect the Fund's ability to track the
index.
The Funds are subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value each Fund's investments as of September 30, 2022, is
included with each Fund's Portfolio of Investments.
In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act, establishing
requirements to determine fair value in good faith for purposes of the 1940 Act.
The rule permits fund boards to designate a fund's investment adviser to perform
fair value determinations, subject to board oversight and certain other
conditions. The rule also defines when market quotations are "readily available"
for purposes of the 1940 Act and requires a fund to fair value a portfolio
investment when a market quotation is not readily available. The SEC also
adopted new Rule 31a-4 under the 1940 Act, which sets forth recordkeeping
requirements associated with fair value determinations. The compliance date for
Rule 2a-5 and Rule 31a-4 was September 8, 2022.
Effective September 8, 2022 and pursuant to the requirements of Rule 2a-5, the
Trust's Board of Trustees designated the Advisor as its valuation designee to
perform fair value determinations and approved new Advisor Valuation Procedures
for the Trust.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
C. FOREIGN CURRENCY
The books and records of the Funds are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statements of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statements of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are included in "Net
realized gain (loss) on foreign currency transactions" on the Statements of
Operations. The portion of foreign currency gains and losses related to
fluctuations in exchange rates between the initial purchase settlement date and
subsequent sale trade date is included in "Net realized gain (loss) on
investments" on the Statements of Operations.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of each Fund, if any, are declared and paid
quarterly, or as the Board of Trustees may determine from time to time.
Distributions of net realized gains earned by each Fund, if any, are distributed
at least annually.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on significantly modified portfolio securities
held by the Funds and have no impact on net assets or NAV per share. Temporary
differences, which arise from recognizing certain items of income, expense and
gain/loss in different periods for financial statement and tax purposes, will
reverse at some time in the future.
The Funds did not pay a distribution during the fiscal period ended September
30, 2022.
As of September 30, 2022, the components of distributable earnings on a tax
basis for each Fund were as follows:
Accumulated Net
Undistributed Capital and Unrealized
Ordinary Other Appreciation
Income Gain (Loss) (Depreciation)
---------------- -------------- --------------
First Trust Nasdaq Lux Digital Health Solutions ETF $ -- $ (17,037) $ (293,815)
First Trust Indxx Metaverse ETF 482 (20,680) (452,641)
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022
E. INCOME TAXES
Each Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, each Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of each Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Funds are subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable period ended 2022
remains open to federal and state audit. As of September 30, 2022, management
has evaluated the application of these standards to the Funds and has determined
that no provision for income tax is required in the Funds' financial statements
for uncertain tax positions.
Each Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
Each Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At September 30, 2022, for
federal income tax purposes, each applicable Fund had a capital loss
carryforward available that is shown in the table below, to the extent provided
by regulations, to offset future capital gains. To the extent that these loss
carryforwards are used to offset future capital gains, it is probable that the
capital gains so offset will not be distributed to each applicable Fund's
shareholders.
Non-Expiring
Capital Loss
Carryforward
---------------------
First Trust Nasdaq Lux Digital Health Solutions ETF $ 17,037
First Trust Indxx Metaverse ETF 20,680
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal period ended September 30, 2022, the Funds
had no net late year ordinary or capital losses. In order to present paid-in
capital and accumulated distributable earnings (loss) (which consists of
accumulated net investment income (loss), accumulated net realized gain (loss)
on investments and net unrealized appreciation (depreciation) on investments) on
the Statements of Assets and Liabilities that more closely represent their tax
character, certain adjustments have been made to paid-in capital, accumulated
net investment income (loss) and accumulated net realized gain (loss) on
investments. These adjustments are primarily due to the difference between book
and tax treatments of income and gains on various investment securities held by
the Funds and in-kind transactions. The results of operations and net assets
were not affected by these adjustments. For the fiscal period ended September
30, 2022, the adjustments for each Fund were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss) on Paid-in
Income (Loss) Investments Capital
---------------- -------------- --------------
First Trust Nasdaq Lux Digital Health Solutions ETF $ 4,916 $ 237,067 $ (241,983)
First Trust Indxx Metaverse ETF (2,639) 169,748 (167,109)
As of September 30, 2022, the aggregate cost, gross unrealized appreciation,
gross unrealized depreciation, and net unrealized appreciation/(depreciation) on
investments (including short positions and derivatives, if any) for federal
income tax purposes were as follows:
Gross Gross Net Unrealized
Unrealized Unrealized Appreciation
Tax Cost Appreciation (Depreciation) (Depreciation)
-------------- -------------- -------------- --------------
First Trust Nasdaq Lux Digital Health
Solutions ETF $ 1,002,616 $ 4,728 $ (298,543) $ (293,815)
First Trust Indxx Metaverse ETF 1,564,441 3,176 (455,816) (452,640)
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Funds, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in each Fund's portfolio, managing the Funds' business affairs and providing
certain administrative services necessary for the management of the Funds.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Funds' assets and is
responsible for the expenses of each Fund including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, acquired
fund fees and expenses, if any, 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,
which are paid by each respective Fund. Each Fund has agreed to pay First Trust
an annual unitary management fee based on each Fund's average daily net assets
at a rate set forth below:
Rate
----------------
First Trust Nasdaq Lux Digital Health Solutions ETF 0.65%
First Trust Indxx Metaverse ETF 0.70%
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
each Fund. As custodian, BNYM is responsible for custody of each Fund's assets.
As fund accountant and administrator, BNYM is responsible for maintaining the
books and records of each Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for each Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee Chairs
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the fiscal period ended September 30, 2022, the cost of purchases and
proceeds from sales of investments for each Fund, excluding short-term
investments and in-kind transactions, were as follows:
Purchases Sales
---------------- --------------
First Trust Nasdaq Lux Digital Health Solutions ETF $ 73,123 $ 73,617
First Trust Indxx Metaverse ETF 3,244,176 254,190
For the fiscal period ended September 30, 2022, the cost of in-kind purchases
and proceeds from in-kind sales for each Fund were as follows:
Purchases Sales
---------------- --------------
First Trust Nasdaq Lux Digital Health Solutions ETF $ 2,038,710 $ 782,287
First Trust Indxx Metaverse ETF -- 1,237,756
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Each Fund generally issues and redeems its shares in primary market transactions
through a creation and redemption mechanism and does not sell or redeem
individual shares. Instead, financial entities known as "Authorized
Participants" have contractual arrangements with a Fund or one of the Fund's
service providers to purchase and redeem Fund shares directly with the Fund in
large blocks of shares known as "Creation Units." Prior to the start of trading
on every business day, a Fund publishes through the National Securities Clearing
Corporation ("NSCC") the "basket" of securities, cash or other assets that it
will accept in exchange for a Creation Unit of the Fund's shares. An Authorized
Participant that wishes to effectuate a creation of a Fund's shares deposits
with the Fund the "basket" of securities, cash or other assets identified by the
Fund that day, and then receives the Creation Unit of the Fund's shares in
return for those assets. After purchasing a Creation Unit, the Authorized
Participant may continue to hold the Fund's shares or sell them in the secondary
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022
market. The redemption process is the reverse of the purchase process: the
Authorized Participant redeems a Creation Unit of a Fund's shares for a basket
of securities, cash or other assets. The combination of the creation and
redemption process with secondary market trading in a Fund's shares and
underlying securities provides arbitrage opportunities that are designed to help
keep the market price of a Fund's shares at or close to the NAV per share of the
Fund.
Each Fund imposes fees in connection with the purchase of Creation Units. These
fees may vary based upon various fact-based circumstances, including, but not
limited to, the composition of the securities included in the Creation Unit or
the countries in which the transactions are settled. The price for each Creation
Unit will equal the daily NAV per share of a Fund times the number of shares in
a Creation Unit, plus the fees described above and, if applicable, any
operational processing and brokerage costs, transfer fees, stamp taxes and part
or all of the spread between the expected bid and offer side of the market
related to the securities comprising the creation basket.
Each Fund also imposes fees in connection with the redemption of Creation Units.
These fees may vary based upon various fact-based circumstances, including, but
not limited to, the composition of the securities included in the Creation Unit
or the countries in which the transactions are settled. The price received for
each Creation Unit will equal the daily NAV per share of a Fund times the number
of shares in a Creation Unit, minus the fees described above and, if applicable,
any operational processing and brokerage costs, transfer fees, stamp taxes and
part or all of the spread between the expected bid and offer side of the market
related to the securities comprising the redemption basket. Investors who use
the services of a broker or other such intermediary in addition to an Authorized
Participant to effect a redemption of a Creation Unit may also be assessed an
amount to cover the cost of such services. The redemption fee charged by a Fund
will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no
more than 2% of the value of the shares redeemed.
6. DISTRIBUTION PLAN
The Board of Trustees 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 First Trust Portfolios L.P. ("FTP"), the distributor of the
Funds, 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
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 7, 2024 for EKG
and April 13, 2024 for ARVR.
7. INDEMNIFICATION
The Trust, on behalf of the Funds, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Funds
through the date the financial statements were issued and has determined that
there was the following subsequent event:
At a meeting on October 24, 2022, the Board of Trustees approved a breakpoint
pricing arrangement for each of the series of the Trust, including the Funds.
Pursuant to this arrangement, which is effective as of November 1, 2022, the
management fee each Fund pays to First Trust, as investment manager, will be
discounted as the Fund's net assets reach certain predefined levels.
Page 23
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF FIRST TRUST EXCHANGE-TRADED FUND
II:
OPINION ON THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS
We have audited the accompanying statements of assets and liabilities of First
Trust Nasdaq Lux Digital Health Solutions ETF and First Trust Indxx Metaverse
ETF (the "Funds"), each a series of the First Trust Exchange-Traded Fund II,
including the portfolios of investments, as of September 30, 2022, and the
related statements of operations, the statement of changes in net assets, and
the financial highlights for the periods listed in the table below, and the
related notes. In our opinion, the financial statements and financial highlights
present fairly, in all material respects, the financial position of the Funds as
of September 30, 2022, and the results of their operations, the statement of
changes in net assets, and the financial highlights for the periods listed in
the table below, in conformity with accounting principles generally accepted in
the United States of America.
----------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL FUNDS STATEMENTS OF STATEMENTS OF FINANCIAL
INCLUDED IN THE TRUST OPERATIONS CHANGES IN NET ASSETS HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------------
First Trust Nasdaq Lux Digital Health For the period from March 22, 2022 (commencement of operations) through
Solutions ETF September 30, 2022
----------------------------------------------------------------------------------------------------------------------------
First Trust Indxx Metaverse ETF For the period from April 19, 2022 (commencement of operations) through
September 30, 2022
----------------------------------------------------------------------------------------------------------------------------
BASIS FOR OPINION
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on the Funds'
financial statements and financial highlights based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to
the Funds in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement, whether due to error or fraud. The Funds are not
required to have, nor were we engaged to perform, an audit of their internal
control over financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Funds' internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements and financial highlights, whether due
to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements and financial highlights. Our audits
also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2022, by correspondence
with the custodian and brokers; when replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 22, 2022
We have served as the auditor of one or more First Trust investment companies
since 2001.
Page 24
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how each Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
each Fund's website at www.ftportfolios.com; and (3) on the Securities and
Exchange Commission's ("SEC") website at www.sec.gov.
PORTFOLIO HOLDINGS
Each Fund files portfolio holdings information for each month in a fiscal
quarter within 60 days after the end of the relevant fiscal quarter on Form
N-PORT. Portfolio holdings information for the third month of each fiscal
quarter will be publicly available on the SEC's website at www.sec.gov. Each
Fund's complete schedule of portfolio holdings for the second and fourth
quarters of each fiscal year is included in the semi-annual and annual reports
to shareholders, respectively, and is filed with the SEC on Form N-CSR. The
semi-annual and annual report for each Fund is available to investors within 60
days after the period to which it relates. Each Fund's Forms N-PORT and Forms
N-CSR are available on the SEC's website listed above.
FEDERAL TAX INFORMATION
There were no distributions made by each Fund during their applicable taxable
period; therefore, no analysis for the corporate dividends received deduction
and qualified dividend income was completed.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. CERTAIN GENERAL RISKS THAT MAY BE
APPLICABLE TO A FUND ARE IDENTIFIED BELOW, BUT NOT ALL OF THE MATERIAL RISKS
RELEVANT TO EACH FUND ARE INCLUDED IN THIS REPORT AND NOT ALL OF THE RISKS BELOW
APPLY TO EACH FUND. THE MATERIAL RISKS OF INVESTING IN EACH FUND ARE SPELLED OUT
IN ITS PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND OTHER REGULATORY
FILINGS. BEFORE INVESTING, YOU SHOULD CONSIDER EACH FUND'S INVESTMENT OBJECTIVE,
RISKS, CHARGES AND EXPENSES, AND READ EACH FUND'S PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION CAREFULLY. YOU CAN DOWNLOAD EACH FUND'S PROSPECTUS AT
WWW.FTPORTFOLIOS.COM OR CONTACT FIRST TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO
REQUEST A PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION ABOUT EACH FUND.
CONCENTRATION RISK. To the extent that a fund is able to invest a significant
percentage of its assets in a single asset class or the securities of issuers
within the same country, state, region, industry or sector, an adverse economic,
business or political development may affect the value of the fund's investments
more than if the fund were more broadly diversified. A fund that tracks an index
will be concentrated to the extent the fund's corresponding index is
concentrated. A concentration makes a fund more susceptible to any single
occurrence and may subject the fund to greater market risk than a fund that is
more broadly diversified.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
CYBER SECURITY RISK. The funds are susceptible to potential operational risks
through breaches in cyber security. A breach in cyber security refers to both
intentional and unintentional events that may cause a fund to lose proprietary
information, suffer data corruption or lose operational capacity. Such events
could cause a fund to incur regulatory penalties, reputational damage,
additional compliance costs associated with corrective measures and/or financial
loss. In addition, cyber security breaches of a fund's third-party service
providers, such as its administrator, transfer agent, custodian, or sub-advisor,
as applicable, or issuers in which the fund invests, can also subject a fund to
many of the same risks associated with direct cyber security breaches.
DEFINED OUTCOME FUNDS RISK. To the extent a fund's investment strategy is
designed to deliver returns tied to the price performance of an underlying ETF,
an investor may not realize the returns the fund seeks to achieve if that
investor does not hold shares for the entire target outcome period. In the event
an investor purchases shares after the first day of the target outcome period or
sells shares prior to the end of the target outcome period, the buffer that the
fund seeks to provide against a decline in the value of the underlying ETF may
not be available, the enhanced returns that the fund seeks to provide (if any)
may not be available and the investor may not participate in a gain in the value
of the underlying ETF up to the cap for the investor's investment period.
Additionally, the fund will not participate in gains of the underlying ETF above
the cap and a shareholder may lose their entire investment. If the fund seeks
enhanced returns, there are certain time periods when the value of the fund may
fall faster than the value of the underlying ETF, and it is very unlikely that,
on any given day during which the underlying ETF share price increases in value,
the fund's share price will increase at the same rate as the enhanced returns
sought by the fund, which is designed for an entire target outcome period.
Trading flexible exchange options involves risks different from, or possibly
greater than, the risks associated with investing directly in securities, such
as less liquidity and correlation and valuation risks. A fund may experience
substantial downside from specific flexible exchange option positions and
certain positions may expire worthless.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
DERIVATIVES RISK. To the extent a fund uses derivative instruments such as
futures contracts, options contracts and swaps, the fund may experience 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 derivative.
These risks are heightened when a 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.
EQUITY SECURITIES RISK. To the extent a fund invests in equity securities, the
value of the fund's shares will fluctuate with changes in the value of the
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 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. Equity
securities may decline significantly in price over short or extended periods of
time, and such declines may occur in the equity market as a whole, or they may
occur in only a particular country, company, industry or sector of the market.
ETF RISK. The shares of an ETF trade like common stock and represent an interest
in a portfolio of securities. The risks of owning an ETF generally reflect the
risks of owning the underlying securities, although lack of liquidity in an ETF
could result in it being more volatile and ETFs have management fees that
increase their costs. Shares of an ETF trade on an exchange 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).
In times of market stress, decisions by market makers to reduce or step away
from their role of providing a market for an ETF's shares, or decisions by an
ETF's authorized participants that they are unable or unwilling to proceed with
creation and/or redemption orders of an ETF's shares, could result in shares of
the ETF trading at a discount to net asset value and in greater than normal
intraday bid-ask spreads.
FIXED INCOME SECURITIES RISK. To the extent a fund invests in fixed income
securities, the fund will be subject to credit risk, income risk, interest rate
risk, liquidity risk and prepayment risk. Income risk is the risk that income
from a fund's fixed income investments could decline during periods of falling
interest rates. Interest rate risk is the risk that the value of a fund's fixed
income securities will decline because of rising interest rates. Liquidity risk
is the risk that a security cannot be purchased or sold at the time desired, or
cannot be purchased or sold without adversely affecting the price. Prepayment
risk is the risk that the securities will be redeemed or prepaid by the issuer,
resulting in lower interest payments received by the fund. In addition to these
risks, high yield securities, or "junk" bonds, are subject to greater market
fluctuations and risk of loss than securities with higher ratings, and the
market for high yield securities is generally smaller and less liquid than that
for investment grade securities.
INDEX OR MODEL CONSTITUENT RISK. Certain funds may be a constituent of one or
more indices or ETF models. As a result, such a fund may be included in one or
more index-tracking exchange-traded funds or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving a
fund, the size of the fund and the market volatility of the fund. Inclusion in
an index could increase demand for the fund and removal from an index could
result in outsized selling activity in a relatively short period of time. As a
result, a fund's net asset value could be negatively impacted and the fund's
market price may be significantly below its net asset value during certain
periods. In addition, index rebalances may potentially result in increased
trading activity in a fund's shares.
INDEX PROVIDER RISK. To the extent a fund seeks to track an index, it is subject
to Index Provider Risk. There is no assurance that the Index Provider will
compile the Index accurately, or that the Index will be determined, maintained,
constructed, reconstituted, rebalanced, composed, calculated or disseminated
accurately. To correct any such error, the Index Provider may carry out an
unscheduled rebalance or other modification of the Index constituents or
weightings, which may increase the fund's costs. The Index Provider does not
provide any representation or warranty in relation to the quality, accuracy or
completeness of data in the Index, and it does not guarantee that the Index will
be calculated in accordance with its stated methodology. Losses or costs
associated with any Index Provider errors generally will be borne by the fund
and its shareholders.
INVESTMENT COMPANIES RISK. To the extent a fund invests in the securities of
other investment vehicles, the fund will incur additional fees and expenses that
would not be present in a direct investment in those investment vehicles.
Furthermore, the fund's investment performance and risks are directly related to
the investment performance and risks of the investment vehicles in which the
fund invests.
LIBOR RISK. To the extent a fund invests in floating or variable rate
obligations that use the London Interbank Offered Rate ("LIBOR") as a reference
interest rate, it is subject to LIBOR Risk. The United Kingdom's Financial
Conduct Authority, which regulates LIBOR has ceased making LIBOR available as a
reference rate over a phase-out period that began December 31, 2021. There is no
assurance that any alternative reference rate, including the Secured Overnight
Financing Rate ("SOFR") will be similar to or produce the same value or economic
equivalence as LIBOR or that instruments using an alternative rate will have the
same volume or liquidity. The unavailability or replacement of LIBOR may affect
the value, liquidity or return on certain fund investments and may result in
costs incurred in connection with closing out positions and entering into new
trades. Any potential effects of the transition away from LIBOR on the fund or
on certain instruments in which the fund invests can be difficult to ascertain,
and they may vary depending on a variety of factors, and they could result in
losses to the fund.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
MANAGEMENT RISK. To the extent that a fund is actively managed, it is subject to
management risk. In managing an actively-managed fund's investment portfolio,
the fund's portfolio managers will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that a fund will
meet its investment objective.
MARKET RISK. Market risk is the risk that a particular security, or shares of a
fund in general, may fall in value. Securities held by a fund, as well as shares
of a fund itself, are subject to market fluctuations caused by factors such as
general economic conditions, political events, regulatory or market
developments, changes in interest rates and perceived trends in securities
prices. Shares of a fund could decline in value or underperform other
investments as a result of the risk of loss associated with these market
fluctuations. In addition, local, regional or global events such as war, acts of
terrorism, spread of infectious diseases or other public health issues,
recessions, or other events could have a significant negative impact on a fund
and its investments. Such events may affect certain geographic regions,
countries, sectors and industries more significantly than others. In February
2022, Russia invaded Ukraine which has caused and could continue to cause
significant market disruptions and volatility within the markets in Russia,
Europe, and the United States. The hostilities and sanctions resulting from
those hostilities could have a significant impact on certain fund investments as
well as fund performance. The COVID-19 global pandemic and the ensuing policies
enacted by governments and central banks have caused and may continue to cause
significant volatility and uncertainty in global financial markets. While the
U.S. has resumed "reasonably" normal business activity, many countries continue
to impose lockdown measures. Additionally, there is no guarantee that vaccines
will be effective against emerging variants of the disease. These events also
adversely affect the prices and liquidity of a fund's portfolio securities or
other instruments and could result in disruptions in the trading markets. Any of
such circumstances could have a materially negative impact on the value of a
fund's shares and result in increased market volatility. During any such events,
a fund's shares may trade at increased premiums or discounts to their net asset
value and the bid/ask spread on a fund's shares may widen.
NON-U.S. SECURITIES RISK. To the extent a fund invests in non-U.S. securities,
it is subject to additional risks not associated with securities of domestic
issuers. 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;
capital controls; lack of liquidity; currency exchange rates; excessive
taxation; government seizure of assets; the imposition of sanctions by foreign
governments; different legal or accounting standards; and less government
supervision and regulation of exchanges in foreign countries. Investments in
non-U.S. securities may involve higher costs than investments in U.S.
securities, including higher transaction and custody costs, as well as
additional taxes imposed by non-U.S. governments. These risks may be heightened
for securities of companies located, or with significant operations, in emerging
market countries.
OPERATIONAL RISK. Each fund is subject to risks arising from various operational
factors, including, but not limited to, human error, processing and
communication errors, errors of a fund's service providers, counterparties or
other third-parties, failed or inadequate processes and technology or systems
failures. Each fund relies on third-parties for a range of services, including
custody. Any delay or failure relating to engaging or maintaining such service
providers may affect a fund's ability to meet its investment objective. Although
the funds and the funds' investment advisor seek to reduce these operational
risks through controls and procedures, there is no way to completely protect
against such risks.
PASSIVE INVESTMENT RISK. To the extent a fund seeks to track an index, the fund
will invest in the securities included in, or representative of, the index
regardless of their investment merit. A fund generally will not attempt to take
defensive positions in declining markets.
VALUATION RISK. The valuation of certain securities may carry more risk than
that of common stock. Uncertainties in the conditions of the financial markets,
unreliable reference data, lack of transparency and inconsistency of valuation
models and processes may lead to inaccurate asset pricing. A fund may hold
investments in sizes smaller than institutionally sized round lot positions
(sometimes referred to as odd lots). However, third-party pricing services
generally provide evaluations on the basis of institutionally-sized round lots.
If a fund sells certain of its investments in an odd lot transaction, the sale
price may be less than the value at which such securities have been held by the
fund. Odd lots often trade at lower prices than institutional round lots. There
is no assurance that the fund will be able to sell a portfolio security at the
price established by the pricing service, which could result in a loss to the
fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
FIRST TRUST INDXX METAVERSE ETF
The Board of Trustees of First Trust Exchange-Traded Fund II (the "Trust"),
including the Independent Trustees, approved the Investment Management Agreement
(the "Agreement") with First Trust Advisors L.P. (the "Advisor"), on behalf of
First Trust Indxx Metaverse ETF (the "Fund"), for an initial two-year term at a
meeting held on January 24, 2022. The Board determined that the Agreement is in
the best interests of the Fund in light of the nature, extent and quality of the
services expected to be provided and such other matters as the Board considered
to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
the general principles of state law, in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreement for
the Fund, the Independent Trustees received a report from the Advisor in advance
of the Board meeting responding to a request for information from counsel to the
Independent Trustees, submitted on behalf of the Independent Trustees, that,
among other things, outlined: the services to be provided by the Advisor to the
Fund (including the relevant personnel responsible for these services and their
experience); the proposed unitary fee rate payable by the Fund as compared to
fees charged to a peer group of funds (the "Expense Group") and a broad peer
universe of funds (the "Expense Universe"), each assembled by Broadridge
Financial Solutions, Inc. ("Broadridge"), an independent source, and as compared
to fees charged to other exchange-traded funds ("ETFs") managed by the Advisor;
the estimated expense ratio of the Fund as compared to expense ratios of the
funds in the Fund's Expense Group and Expense Universe; the nature of expenses
to be incurred in providing services to the Fund and the potential for the
Advisor to realize economies of scale, if any; profitability and other financial
data for the Advisor; any fall-out benefits to the Advisor and its affiliate,
First Trust Portfolios L.P. ("FTP"); and information on the Advisor's compliance
program. The Independent Trustees and their counsel also met separately to
discuss the information provided by the Advisor. The Board applied its business
judgment to determine whether the arrangement between the Trust and the Advisor
is a reasonable business arrangement from the Fund's perspective.
In evaluating whether to approve the Agreement for the Fund, the Board
considered the nature, extent and quality of the services to be provided by the
Advisor under the Agreement and considered that employees of the Advisor provide
management services to other ETFs and to other funds in the First Trust Fund
Complex with diligence and care. The Board considered that the Advisor will be
responsible for the overall management and administration of the Fund and
reviewed all of the services to be provided by the Advisor to the Fund. The
Board also considered the background and experience of the persons who will be
responsible for the day-to-day management of the Fund's investments. In
reviewing the services to be provided, the Board noted the compliance program
that had been developed by the Advisor and considered that it includes a robust
program for monitoring the Advisor's and the Fund's compliance with the 1940
Act, as well as the Fund's compliance with its investment objective, policies
and restrictions. Because the Fund had yet to commence investment operations,
the Board could not consider the historical investment performance of the Fund.
Because the Fund is an index ETF that is designed to track the performance of an
underlying index, the Board considered reports it receives on a quarterly basis
showing the correlation and tracking error between other ETFs for which the
Advisor serves as investment advisor and their applicable underlying indexes. In
light of the information presented and the considerations made, the Board
concluded that the nature, extent and quality of the services to be provided to
the Fund by the Advisor under the Agreement are expected to be satisfactory.
The Board considered the proposed unitary fee rate payable by the Fund under the
Agreement for the services to be provided. The Board noted that, under the
unitary fee arrangement, the Fund would pay the Advisor a unitary fee equal to
an annual rate of 0.70% of its average daily net assets. The Board noted that
the Advisor would be responsible for the Fund's expenses, including the cost of
transfer agency, custody, fund administration, legal, audit and other services
and license fees, if any, but excluding the fee payment under the Agreement and
interest, taxes, acquired fund fees and expenses, if any, brokerage commissions
and other expenses connected with the execution of portfolio transactions,
distribution and service fees pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses, if any. The Board received and reviewed information
showing the fee rates and expense ratios of the peer funds in the Expense Group,
as well as advisory and unitary fee rates charged by the Advisor to other ETFs.
Because the Fund will pay a unitary fee, the Board determined that expense
ratios were the most relevant comparative data point. Based on the information
provided, the Board noted that the unitary fee rate for the Fund was above the
median total (net) expense ratio of the peer funds in the Expense Group. With
respect to the Expense Group, the Board discussed with representatives of the
Advisor how the Expense Group was assembled and how the Fund compared and
differed from the peer funds. The Board took this information into account in
considering the peer data. With respect to fees charged to other ETFs managed by
the Advisor, the Board considered the Advisor's statement that the Fund will be
most comparable to three other index ETFs managed by the Advisor that pay
unitary fees equal to annual rates of 0.65% or 0.70% of their respective average
daily net assets due to their shared focus on global thematic technology
exposures with robust selection methodologies and objectives to track a given
market segment. In light of the information considered and the nature, extent
and quality of the services expected to be provided to the Fund under the
Agreement, the Board determined that the proposed unitary fee was fair and
reasonable.
The Board noted that the proposed unitary fee for the Fund was not structured to
pass on to shareholders the benefits of any economies of scale as the Fund's
assets grow. The Board noted that any reduction in fixed costs associated with
the management of the Fund would benefit the Advisor, but that the unitary fee
structure provides a level of certainty in expenses for the Fund. The Board
noted that the Advisor has continued to hire personnel and build infrastructure,
including technology, to improve the services to the funds in the First Trust
Fund Complex. The Board took into consideration the types of costs to be borne
by the Advisor in connection with its services to be performed for the Fund
under the Agreement. The Board considered the Advisor's estimate of the asset
level for the Fund at which the Advisor expects the Agreement to be profitable
to the Advisor and the Advisor's estimate of the profitability of the Agreement
if the Fund's assets reach $100 million. The Board noted the inherent
limitations in the profitability analysis and concluded that, based on the
information provided, the Advisor's estimated profitability level for the Fund
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
was not unreasonable. The Board considered fall-out benefits described by the
Advisor that may be realized from its relationship with the Fund. The Board
considered that the Advisor had identified as a fall-out benefit to the Advisor
and FTP their exposure to investors and brokers who, absent their exposure to
the Fund, may have had no dealings with the Advisor or FTP. The Board also noted
that the Advisor will not utilize soft dollars in connection with the Fund. The
Board concluded that the character and amount of potential fall-out benefits to
the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreement are fair and reasonable and that the approval of the Agreement is in
the best interests of the Fund. No single factor was determinative in the
Board's analysis.
LIQUIDITY RISK MANAGEMENT PROGRAM
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as
amended (the "1940 Act"), the Funds and each other fund in the First Trust Fund
Complex, other than the closed-end funds, have adopted and implemented a
liquidity risk management program (the "Program") reasonably designed to assess
and manage the funds' liquidity risk, i.e., the risk that a fund could not meet
requests to redeem shares issued by the fund without significant dilution of
remaining investors' interests in the fund. The Board of Trustees of the First
Trust Funds has appointed First Trust Advisors, L.P. (the "Advisor") as the
person designated to administer the Program, and in this capacity the Advisor
performs its duties primarily through the activities and efforts of the First
Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of
each fund's portfolio investments into one of the four liquidity categories
specified by Rule 22e-4: highly liquid investments, moderately liquid
investments, less liquid investments and illiquid investments. The Liquidity
Committee determines certain of the inputs for this classification process,
including reasonably anticipated trade sizes and significant investor dilution
thresholds. The Liquidity Committee also determines and periodically reviews a
highly liquid investment minimum for certain funds, monitors the funds' holdings
of assets classified as illiquid investments to seek to ensure they do not
exceed 15% of a fund's net assets and establishes policies and procedures
regarding redemptions in kind.
At the April 18, 2022 meeting of the Board of Trustees, as required by Rule
22e-4 and the Program, the Advisor provided the Board with a written report
prepared by the Advisor that addressed the operation of the Program during the
period from March 16, 2021 through the Liquidity Committee's annual meeting held
on March 17, 2022 and assessed the Program's adequacy and effectiveness of
implementation during this period, including the operation of the highly liquid
investment minimum for each fund that is required under the Program to have one,
and any material changes to the Program. Note that because the Funds primarily
hold assets that are highly liquid investments, the Funds have not adopted any
highly liquid investment minimums.
As stated in the written report, during the review period, no fund breached the
15% limitation on illiquid investments, no fund with a highly liquid investment
minimum breached that minimum and no fund filed a Form N-LIQUID. The Advisor
concluded that each fund's investment strategy is appropriate for an open-end
fund; that the Program operated effectively in all material respects during the
review period; and that the Program is reasonably designed to assess and manage
the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
Page 29
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
The following tables identify the Trustees and Officers of the Trust. Unless
otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite
400, Wheaton, IL 60187.
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
YEAR OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician, Edward-Elmhurst Medical 221 None
(1951) Group; Physician and Officer,
o Since Inception Wheaton Orthopedics (1990 to 2021)
Thomas R. Kadlec, Trustee o Indefinite Term Retired; President, ADM Investors 221 Director, National Futures
(1957) Services, Inc. (Futures Commission Association and ADMIS
o Since Inception Merchant) (2010 to July 2022) Singapore Ltd.; Formerly,
Director of ADM Investor
Services, Inc., ADM
Investor Services
International, ADMIS
Hong Kong Ltd., and
Futures Industry
Association
Denise M. Keefe, Trustee o Indefinite Term Executive Vice President, Advocate 221 Director and Board Chair
(1964) Aurora Health and President, of Advocate Home Health
o Since 2021 Advocate Aurora Continuing Health Services, Advocate Home
Division (Integrated Healthcare Care Products and
System) Advocate Hospice;
Director and Board Chair
of Aurora At Home (since
2018); Director of
Advocate Physician
Partners Accountable Care
Organization; Director and
Board Chair of RML Long
Term Acute Care
Hospitals; and Director of
Senior Helpers (since
2021)
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 221 Formerly, Director of
(1956) (Financial and Management Trust Company of Illinois
o Since Inception Consulting)
Niel B. Nielson, Trustee o Indefinite Term Senior Advisor (2018 to Present), 221 None
(1954) Managing Director and Chief
o Since Inception Operating Officer (2015 to 2018),
Pelita Harapan Educational
Foundation (Educational
Products and Services)
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First 221 None
Chairman of the Board Trust Advisors L.P. and First
(1955) Trust Portfolios L.P.,
o Since Inception Chairman of the Board of
Directors, BondWave LLC (Software
Development Company) and
Stonebridge Advisors LLC
(Investment Advisor)
------------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 30
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME AND OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
YEAR OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer, First
(1966) Executive Officer Trust Advisors L.P. and First Trust Portfolios L.P.;
o Since Inception Chief Financial Officer, BondWave LLC (Software
Development Company) and Stonebridge Advisors
LLC (Investment Advisor)
Donald P. Swade Treasurer, Chief Financial Officer o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1972) and Chief Accounting Officer First Trust Portfolios L.P.
o Since Inception
W. Scott Jardine Secretary and Chief Legal Officer o Indefinite Term General Counsel, First Trust Advisors L.P. and First
(1960) Trust Portfolios L.P.; Secretary and General Counsel,
o Since Inception BondWave LLC; Secretary, Stonebridge Advisors LLC
Daniel J. Lindquist Vice President o Indefinite Term Managing Director, First Trust Advisors L.P. and First
(1970) Trust Portfolios L.P.
o Since Inception
Kristi A. Maher Chief Compliance Officer and o Indefinite Term Deputy General Counsel, First Trust Advisors L.P. and
(1966) Assistant Secretary First Trust Portfolios L.P.
o Since Inception
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1966) First Trust Portfolios L.P.
o Since Inception
Stan Ueland Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1970) First Trust Portfolios L.P.
o Since Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 31
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2022 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
professional or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
USE OF WEBSITE ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis, to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2022
Page 32
FIRST TRUST
First Trust Exchange-Traded Fund II
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
[BLANK BACK COVER]