|
First
Trust
Exchange-Traded
Fund II |
Prospectus
First Trust
IPOX® Europe Equity
Opportunities ETF
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Ticker
Symbol: |
FPXE |
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Exchange: |
Nasdaq |
First Trust
IPOX® Europe Equity Opportunities ETF (the
“Fund”) lists and principally trades its
shares on The Nasdaq Stock Market LLC ("Nasdaq" or the "Exchange"). Market prices may differ to some
degree from the net asset value of the shares. Unlike mutual funds, the Fund
issues and redeems shares at net asset value, only in large blocks of shares
called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund II (the “Trust”) and an
exchange-traded index fund organized as a separate series of a registered
management investment company.
Except
when aggregated in Creation Units, the shares are not redeemable securities of
the Fund.
The
Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
NOT
FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
February
1,
2022
Summary
Information
(fees paid directly from your investment)
|
Maximum
Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price) |
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(expenses that you pay each year as a percentage of the value of your investment)
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Management
Fees |
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Distribution
and Service (12b-1) Fees |
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Other
Expenses |
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Total
Annual Fund Operating Expenses |
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
$ |
3
4
5
6
7
Calendar Year Total Returns as of 12/31
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|
|
|
|
|
|
|
|
|
8
|
|
1
Year |
Since
Inception |
Inception
Date |
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Return Before
Taxes |
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|
|
|
Return After
Taxes on Distributions |
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|
|
Return After
Taxes on Distributions and Sale of Shares |
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|
IPOX® 100 Europe
Index (reflects no deduction for fees, expenses or
taxes) |
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|
|
MSCI Europe
Index (reflects no deduction for fees, expenses or
taxes) |
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|
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Management
Investment
Advisor
First
Trust Advisors L.P. (“First
Trust”
or the “Advisor”)
Portfolio
Managers
The
Fund’s portfolio is managed by a team (the “Investment
Committee”) consisting
of:
•
Daniel J. Lindquist,
Chairman of the Investment Committee and Managing Director of First
Trust
•
Jon C. Erickson,
Senior Vice President of First Trust
•
David G. McGarel,
Chief Investment Officer, Chief Operating Officer and Managing Director of First
Trust
•
Roger F. Testin,
Senior Vice President of First Trust
•
Stan Ueland, Senior
Vice President of First Trust
•
Chris A. Peterson,
Senior Vice President of First Trust
•
Erik Russo, Vice President of First
Trust
The Investment
Committee members are primarily and jointly responsible for the day-to-day
management of the Fund. Each Investment Committee member has
served as a part of the portfolio management team of the Fund since 2018, except
Erik Russo, who has served as a part of the portfolio management team of the
Fund since 2020.
Purchase
and Sale of Fund Shares
The Fund issues and
redeems shares on a continuous basis, at net asset value, only in large blocks of shares called
“Creation Units.” Individual shares of the Fund may only be purchased and sold
on the secondary market through a broker-dealer. Since shares of the Fund trade
on securities exchanges in the secondary market at their market price rather
than their net asset value, the Fund’s shares may trade at a price greater than
(premium) or less than (discount) the Fund’s net asset value. An investor may
incur costs attributable to the difference between the highest price a buyer is
willing to pay to purchase shares of the Fund (bid) and the lowest price a
seller is willing to accept for shares of the Fund (ask) when buying or selling
shares in the secondary market (the “bid-ask
spread”). Recent
information, including the Fund’s net asset value, market price, premiums and
discounts, bid-ask spreads and the median bid-ask spread for the Fund’s most
recent fiscal year, is available online at
https://www.ftportfolios.com/Retail/etf/home.aspx.
Tax
Information
The
Fund’s distributions are taxable and will generally be taxed as ordinary income
or capital gains. Distributions on shares held in a
tax-deferred account, while not immediately taxable, will be subject to tax when
the shares are no longer held in a tax-deferred account.
9
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust
Portfolios L.P., the Fund's distributor, may pay the intermediary for the sale
of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other intermediary and your
salesperson to recommend the Fund over another investment. Ask your salesperson
or visit your financial intermediary’s website for more information.
10
Additional
Information on the Fund's Investment Objective and Strategies
The
Fund is a series of First Trust Exchange-Traded Fund II and is regulated as an
“investment company” under the 1940 Act. The Fund operates as
an index fund and is not actively managed by First Trust. As such, the Fund’s
investment objective is to provide investment results that correspond generally
to the price and yield (before the Fund’s fees and expenses) of the Index. In
seeking to achieve this objective, the Fund will normally invest at least 90% of
its net assets (including investment borrowings) in the securities that comprise
the Index. The Fund will generally employ a full replication strategy, meaning
that it will normally invest in all of the securities comprising the Index in
proportion to their weightings in the Index. However, under various
circumstances, full replication of the Index may not be possible or practicable.
In those circumstances, the Fund may purchase a sample of securities in the
Index. There may also be instances in which First Trust may choose to overweight
certain securities in the Index, purchase securities not in the Index which
First Trust believes are appropriate to substitute for certain securities in the
Index, use futures or derivative instruments or utilize various combinations of
the above techniques in seeking to track the Index. The Fund may sell securities
that are represented in the Index in anticipation of their removal from the
Index or purchase securities not represented in the Index in anticipation of
their addition to the Index.
The
Fund’s investment objective, its 90% investment strategy and each of the
policies described herein are non-fundamental policies that may be
changed by the Board of Trustees of the Trust (the “Board”) without shareholder
approval upon 60 days’ prior written notice to shareholders. Certain fundamental
policies of the Fund are set forth in the Statement of Additional Information
(“SAI”) under “Investment
Objective and Policies.”
While
it is not expected that the Fund will invest in the securities of other
investment companies, any such investments would be subject to
limitations imposed by the 1940 Act and the related rules and interpretations.
The Fund has adopted a policy that it will not invest in other investment
companies in excess of 1940 Act limits in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
IPOX®−100
Europe Index
The
IPOX®−100 Europe Index
seeks to measure the performance of the equity securities of the 100 largest and
typically most liquid IPOs of companies that are economically tied to Europe.
The Index is composed of common stock and depositary receipts. It is rebalanced
quarterly in March, June, September and December. More information regarding the
Index, including additional detail on the Index methodology, may be found on the
Index Provider’s website. Neither the Fund, the Board, First Trust, or any of
their affiliates, are responsible for the information set forth on the Index
Provider’s website. Information from the Index Provider’s website and any other
information not expressly included in this prospectus is not incorporated by
reference in, and should not be considered part of this prospectus.
Fund
Investments
Principal
Investments
Equity
Securities
The
Fund invests in equity securities, including common stocks and depositary
receipts. Common stock represents an equity ownership interest in
issuers. Holders of common stock are entitled to the income and increase in the
value of the assets and business of the issuers after all debt obligations and
obligations to preferred stockholders are satisfied. Depositary receipts are
certificates typically issued by a bank or trust company that represent
ownership interests in securities of non-U.S. companies. Depositary receipts may
or may not be jointly sponsored by the underlying issuer.
Non-Principal
Investments
Cash
Equivalents and Short-Term Investments
Normally,
the Fund invests substantially all of its assets to meet its investment
objective. The Fund may invest the remainder of its assets in
securities with maturities of less than one year or cash equivalents, or it may
hold cash. The percentage of the Fund invested in such holdings varies and
depends on several factors, including market conditions. For temporary defensive
purposes and during periods of high cash inflows or outflows, the Fund may
depart from its principal investment strategies and invest part or all of its
assets in these securities, or it may hold cash. During such periods, the Fund
may not be able to achieve its investment objective. The Fund may adopt a
defensive strategy when the portfolio managers believe securities in
11
which
the Fund normally invests have elevated risks due to political or economic
factors and in other extraordinary circumstances. For
more information on eligible short-term investments, see the SAI.
Illiquid
Investments
The Fund may invest
up to 15% of its net assets in securities and other instruments that are, at the
time of investment, illiquid (determined using the Securities and
Exchange Commission's standard applicable to investment companies, i.e., any investment that the Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment). For this purpose, illiquid
investments may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the “Securities
Act”), that are deemed
to be illiquid, and certain repurchase agreements.
Disclosure
of Portfolio Holdings
The
Fund's portfolio holdings are available on the Fund's website at
www.ftportfolios.com. A description of the policies and procedures with
respect to the disclosure of the Fund's portfolio securities is included in the
Fund's SAI, which is available on the Fund's website at
www.ftportfolios.com.
Risks
of Investing in the Fund
Risk is inherent in
all investing. Investing in the Fund involves risk, including the risk that you
may lose all or part of your investment. There can be no assurance
that the Fund will meet its stated objective. Before you invest, you should
consider the following disclosure pertaining to the Principal Risks set forth
above as well as additional Non-Principal Risks set forth below in this
prospectus. The order of the below risk factors does not indicate the
significance of any particular risk factor.
Principal
Risks
AUTHORIZED
PARTICIPANT CONCENTRATION RISK. Only an authorized participant may
engage in creation or redemption transactions directly with the Fund. A limited
number of institutions act as authorized participants for the Fund. However,
participants are not obligated to make a market in the Fund’s shares or submit
purchase and redemption orders for creation units. To the extent that these
institutions exit the business, reduce their role or are unable to proceed with
creation and/or redemption orders and no other authorized participant steps
forward to create or redeem, the Fund’s shares may trade at a premium or
discount to the Fund’s net asset value and possibly face delisting.
CURRENCY
RISK.
The Fund invests in securities denominated in a non-U.S. currency. Changes in
currency exchange rates affect the value of investments denominated in a foreign
currency, the value of dividends and interest earned from such securities and
gains and losses realized on the sale of such securities. The Fund’s net asset
value could decline if a currency to which the Fund has exposure depreciates
against the U.S. dollar or if there are delays or limits on repatriation of such
currency. Currency exchange rates can be very volatile and can change quickly
and unpredictably. Changes in currency exchange rates may affect the Fund's net
asset value, the value of dividends and interest earned, and gains and losses
realized on the sale of securities. An increase in the strength of the U.S.
dollar relative to other currencies may cause the value of the Fund to decline.
Certain non-U.S. currencies may be particularly volatile, and non-U.S.
governments may intervene in the currency markets, causing a decline in value or
liquidity in the Fund's non-U.S. holdings whose value is tied to the affected
non-U.S. currency. Additionally, the prices of non-U.S. securities that are
traded in U.S. dollars are often indirectly influenced by currency
fluctuations.
CYBER
SECURITY RISK. The Fund is
susceptible to operational risks through breaches in cyber security. A breach in
cyber security refers to both intentional and unintentional events that may
cause the Fund to lose proprietary information, suffer data corruption or lose
operational capacity. Such events could cause the Fund to incur regulatory
penalties, reputational damage, additional compliance costs associated with
corrective measures and/or financial loss. These risks typically are not covered
by insurance. In general, cyber incidents can result from deliberate attacks or
unintentional events. Cyber incidents include, but are not limited to, gaining
unauthorized access to digital systems (e.g., through “hacking”
or malicious software coding) for purposes of misappropriating assets or
sensitive information, corrupting data or causing operational disruption. Cyber
attacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make
network services unavailable to intended users). Cyber security failures by or
breaches of the systems of the Advisor, distributor and other service providers
(including, but not limited to, sub-advisors, index providers, fund accountants,
custodians, transfer agents and administrators), market makers, authorized
participants or the issuers of securities in which the Fund invests, have the
ability to cause disruptions and impact business
12
operations,
potentially resulting in: financial losses; interference with the Fund’s ability
to calculate its net asset value; disclosure of confidential
trading information; impediments to trading; submission of erroneous trades or
erroneous creation or redemption orders; the inability of the Fund or its
service providers to transact business; violations of applicable privacy and
other laws; regulatory fines penalties, reputational damage, reimbursement or
other compensation costs; or additional compliance costs. Substantial costs may
be incurred by the Fund in order to resolve or prevent cyber incidents in the
future. While the Fund has established business continuity plans in the event
of, and risk management systems to prevent, such cyber attacks, there are
inherent limitations in such plans and systems, including the possibility that
certain risks have not been identified and that prevention and remediation
efforts will not be successful. Furthermore, the Fund cannot control the cyber
security plans and systems put in place by service providers to the Fund,
issuers in which the Fund invests, market makers or authorized participants.
However, there is no guarantee that such efforts will succeed, and the Fund and
its shareholders could be negatively impacted as a result.
DEPOSITARY
RECEIPTS RISK. The Fund invests in
depositary receipts. Depository receipts are securities issued by a bank or
trust company reflecting ownership of underlying securities issued by a foreign
company. An investment in depositary receipts involves further risks due to
certain unique features. Any distributions paid to the holders of depositary
receipts are usually subject to a fee charged by the depositary. Holders of
depositary receipts may have limited voting rights pursuant to a deposit
agreement between the underlying issuer and the depositary. In certain cases,
the depositary will vote the shares deposited with it as directed by the
underlying issuer’s board of directors. Furthermore, investment restrictions in
certain countries may adversely impact the value of depositary receipts because
such restrictions may limit the ability to convert shares into depositary
receipts and vice versa. Such restrictions may cause shares of the underlying
issuer to trade at a discount or premium to the market price of the depositary
receipt. Moreover, if depositary receipts are converted into shares, the laws in
certain countries may limit the ability of a non-resident to trade the shares
and to reconvert the shares to depositary receipts. Depositary receipts may be
“sponsored” or “unsponsored.” Sponsored depositary receipts are established
jointly by a depositary and the underlying issuer, whereas unsponsored
depositary receipts may be established by a depositary without participation by
the underlying issuer. Holders of unsponsored depositary receipts generally bear
all the costs associated with establishing the unsponsored depositary receipts.
In addition, the issuers of the securities underlying unsponsored depositary
receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the depositary receipts.
EQUITY
SECURITIES RISK. The value of the
Fund’s shares will fluctuate with changes in the value of the equity securities
in which it invests.
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 equity market, such as market volatility, or when political or
economic events affecting the issuers occur. 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. Additionally, holders of an issuer's
common stock may be subject to greater risks than holders of its preferred stock
and debt securities because common stockholders' claims are subordinated to
those of holders of preferred stocks and debt securities upon the bankruptcy of
an issuer.
EUROPE
RISK. The Fund may
invest in the securities of European issuers. Therefore, in addition to the
risks associated with investments in non-U.S. securities generally, The Fund is
subject to certain risks associated specifically with investments in securities
of European issuers. Political or economic disruptions in European countries,
even in countries in which The Fund is not invested, may adversely affect
security values and thus The Fund’s holdings. A significant number of countries
in Europe are member states in the EU, and the member states no longer control
their own monetary policies by directing independent interest rates for their
currencies. In these member states, the authority to direct monetary policies,
including money supply and official interest rates for the Euro, is exercised by
the European Central Bank. In a 2016 referendum, the United Kingdom elected to
withdraw from the EU. After years of negotiations between the United Kingdom and
the EU, a withdrawal agreement was reached whereby the United Kingdom formally
left the EU. As the second largest economy among EU members, the implications of
the United Kingdom’s withdrawal are difficult to gauge and cannot be fully
known. Trade between the United Kingdom and the EU is highly integrated through
supply chains and trade in services, as well as through multinational companies.
The United Kingdom’s departure may negatively impact the EU and Europe as a
whole by causing volatility within the EU, triggering prolonged economic
downturns in certain European countries or sparking additional member states to
contemplate departing the EU (thereby perpetuating political instability in the
region).
INDEX
CONCENTRATION RISK. The
Fund will be concentrated in an industry or a group of industries to the extent
that the Index is so concentrated. To the extent that the Fund invests 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
13
development may affect the value of
the Fund’s investments more than if the Fund were more broadly diversified. A
significant exposure makes the Fund more susceptible to any single occurrence
and may subject the Fund to greater market risk than a fund that is more broadly
diversified. There may be instances in which the Index, for a variety of reasons
including changes in the prices of individual securities held by the Fund, has a
larger exposure to a small number of stocks or a single stock relative to the
rest of the stocks in the Index. Under such circumstances, the Fund will not
deviate from the Index except in rare circumstances or in an immaterial way and
therefore the Fund’s returns would be more greatly influenced by the returns of
the stock(s) with the larger exposure.
INDEX
OR
MODEL CONSTITUENT RISK.
The Fund may be a constituent of one or more indices or ETF models. As a result,
the Fund may be included in one or more index-tracking ETFs or mutual funds.
Being a component security of such a vehicle could greatly affect the trading
activity involving the Fund, the size of the Fund and the market volatility of
the Fund’s shares. 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, the Fund’s net asset value could be
negatively impacted and the Fund’s market price may be below the Fund’s net
asset value during certain periods. In addition, index rebalances may
potentially result in increased trading activity. To the extent buying or
selling activity increases, the Fund can be exposed to increased brokerage costs
and adverse tax consequences and the market price of the Fund can be negatively
affected.
INDEX
PROVIDER RISK. There is
no assurance that the Index Provider, or any agents that act on its behalf, will
compile the Index accurately, or that the Index will be determined, maintained,
constructed, reconstituted, rebalanced, composed, calculated or disseminated
accurately. The Index Provider and its agents do not provide any representation
or warranty in relation to the quality, accuracy or completeness of data in the
Index, and do not guarantee that the Index will be calculated in accordance with
its stated methodology. The Advisor’s mandate as described in this prospectus is
to manage the Fund consistently with the Index provided by the Index Provider.
The Advisor relies upon the Index provider and its agents to accurately compile,
maintain, construct, reconstitute, rebalance, compose, calculate and disseminate
the Index accurately. Therefore, losses or costs associated with any Index
Provider or agent errors generally will be borne by the Fund and its
shareholders. To correct any such error, the Index Provider or its agents may
carry out an unscheduled rebalance of the Index or other modification of Index
constituents or weightings. When the Fund in turn rebalances its portfolio, any
transaction costs and market exposure arising from such portfolio rebalancing
will be borne by the Fund and its shareholders. Unscheduled rebalances also
expose the Fund to additional tracking error risk. Errors in respect of the
quality, accuracy and completeness of the data used to compile the Index may
occur from time to time and may not be identified and corrected by the Index
Provider for a period of time or at all, particularly where the Index is less
commonly used as a benchmark by funds or advisors. For example, during a period
where the Index contains incorrect constituents, the Fund tracking the Index
would have market exposure to such constituents and would be underexposed to the
Index’s other constituents. Such errors may negatively impact the Fund and its
shareholders. The Index Provider and its agents rely on various sources of
information to assess the criteria of issuers included in the Index, including
information that may be based on assumptions and estimates. Neither the Fund nor
the Advisor can offer assurances that the Index’s calculation methodology or
sources of information will provide an accurate assessment of included issuers.
Unusual market conditions may cause the Index Provider to postpone a scheduled
rebalance, which could cause the Index to vary from its normal or expected
composition. The postponement of a scheduled rebalance in a time of market
volatility could mean that constituents that would otherwise be removed at
rebalance due to changes in market capitalizations, issuer credit ratings, or
other reasons may remain, causing the performance and constituents of the Index
to vary from those expected under normal conditions. Apart from scheduled
rebalances, the Index Provider or its agents may carry out additional ad hoc
rebalances to the Index due to unusual market conditions or in order, for
example, to correct an error in the selection of index
constituents.
INFORMATION
TECHNOLOGY COMPANIES RISK. The Fund invests significantly in
information technology companies. Information technology companies produce and
provide hardware, software and information technology systems and services.
Information technology companies are generally subject to the following risks:
rapidly changing technologies and existing product obsolescence; short product
life cycles; fierce competition; aggressive pricing and reduced profit margins;
the loss of patent, copyright and trademark protections; cyclical market
patterns; evolving industry standards; and frequent new product introductions
and new market entrants. Information technology companies may be smaller and
less experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, particularly those involved with the internet, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance. In addition, information technology companies are
particularly vulnerable to federal, state and local government regulation, and
competition and consolidation, both domestically and internationally, including
competition from foreign competitors with lower production costs. Information
technology companies also face competition for services of qualified personnel
and heavily rely on patents and intellectual property rights and the ability to
enforce such rights to maintain a competitive advantage.
14
IPO
RISK.
The Fund may invest in shares recently issued by companies undergoing an IPO.
Shares issued by such companies are often subject to extreme price volatility
and speculative trading due to factors such as the absence of a prior public
market, unseasoned trading, the small number of shares available for trading and
limited information about the issuer’s business model, quality of management,
earnings growth potential and other criteria used to evaluate its investment
prospects. Such stocks may have exhibited price appreciation in connection with
the IPO that is not sustained, and it is not uncommon for stocks to decline in
value in the period following the IPO. In addition, the market for IPO shares
can be speculative and/or inactive for extended periods of time. The limited
number of shares available for trading in some IPOs may make it more difficult
for the Fund to buy or sell significant amounts of shares without an unfavorable
impact on prevailing prices. Investors in IPO shares can be affected by
substantial dilution in the value of their shares, by sales of additional shares
and by concentration of control in existing management and principal
shareholders.
MARKET
MAKER RISK. The Fund faces
numerous market trading risks, including the potential lack of an active market
for Fund shares due to a limited number of market markers. Decisions by market
makers or authorized participants to reduce their role or step away from these
activities in times of market stress could inhibit the effectiveness of the
arbitrage process in maintaining the relationship between the underlying values
of the Fund’s portfolio securities and the Fund’s market price. The Fund may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in the
spread between the Fund’s net asset value and the price at which the Fund’s
shares are trading on the Exchange, which could result in a decrease in value of
the Fund’s shares. This reduced effectiveness could result in Fund shares
trading at a discount to net asset value and also in greater than normal
intraday bid-ask spreads for Fund shares.
MARKET
RISK. Market risk is the
risk that a particular security, or shares of the Fund in general, may fall in
value. Securities are subject to market fluctuations caused by such factors as
economic, political, regulatory or market developments, changes in interest
rates and perceived trends in securities prices. Shares of the Fund could
decline in value or underperform other investments due to short-term market
movements or any longer periods during more prolonged market downturns. 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 the Fund and its
investments. For example, the coronavirus disease 2019 (COVID-19) global
pandemic and the aggressive responses taken by many governments, including
closing borders, restricting international and domestic travel, and the
imposition of prolonged quarantines or similar restrictions, had negative
impacts, and in many cases severe impacts, on markets worldwide. While the
development of vaccines has slowed the spread of the virus and allowed for the
resumption of reasonably normal business activity in the United States, many
countries continue to impose lockdown measures in an attempt to slow the spread.
Additionally, there is no guarantee that vaccines will be effective against
emerging variants of the disease. As this global pandemic illustrated, such
events may affect certain geographic regions, countries, sectors and industries
more significantly than others. These events also adversely affect the prices
and liquidity of the 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 the Fund’s shares and result
in increased market volatility. During any such events, the Fund’s shares may
trade at increased premiums or discounts to their net asset value.
NON-CORRELATION
RISK.
The Fund’s return may not match the return of its Index for a number of reasons.
The Fund incurs operating expenses not applicable to its Index and may incur
costs in buying and selling securities, especially when rebalancing the Fund’s
portfolio holdings to reflect changes in the composition of the Index. In
addition, the Fund’s portfolio holdings may not exactly replicate the securities
included in its Index or the ratios between the securities included in the
Index.
NON-DIVERSIFICATION
RISK.
The Fund is operated in a non-diversified manner. As a “non-diversified” fund,
the Fund may hold a smaller number of portfolio securities than many other funds
and may be more sensitive to any single economic, business, political or
regulatory occurrence than a diversified fund. To the extent the Fund invests in
a relatively small number of issuers due to the high percentage of the Fund’s
assets invested in that security, a decline in the market value of a particular
security held by the Fund may affect its value more than if it invested in a
larger number of issuers. The value of the Fund’s shares may be more volatile
than the values of shares of more diversified funds.
NON-U.S.
SECURITIES RISK. The Fund invests in
non-U.S. securities. An investment in securities of non-U.S. companies involves
risks not associated with domestic issuers. Investment in non-U.S. securities
may involve higher costs than investment in U.S. securities, including higher
transaction and custody costs as well as the imposition of additional taxes by
non-U.S. governments. Non-U.S. investments may also involve risks associated
with the level of currency exchange rates, less complete financial information
about the issuers, less market liquidity, more market volatility and political
instability. Future political and economic developments, the possible imposition
of withholding taxes on dividend income, the possible seizure or nationalization
of
15
non-U.S.
holdings, the imposition of sanctions by foreign governments, the possible
establishment of capital controls, exchange controls or freezes
on the convertibility of currency or the adoption of other governmental
restrictions might adversely affect an investment in non-U.S. securities.
Additionally, non-U.S. issuers may be subject to less stringent regulation, and
to different accounting, auditing and recordkeeping requirements. The U.S. and
non-U.S. markets often rise and fall at different times or by different amounts
due to economic or other regional developments particular to a given country or
region.
OPERATIONAL
RISK. The Fund is
subject to risks arising from various operational factors, including, but not
limited to, human error, processing and communication errors, errors of the
Fund’s service providers, counterparties or other third-parties, failed or
inadequate processes and technology or systems failures. The 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 the Fund’s
ability to meet its investment objective. Although the Fund and the Fund’s
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. The Fund is not
actively managed. The Fund invests in securities included in or representative
of its Index regardless of investment merit. The Fund generally will not attempt
to take defensive positions in declining markets. In the event that the Index is
no longer calculated, the Index license is terminated or the identity or
character of the Index is materially changed, the Fund will seek to engage a
replacement index.
PORTFOLIO
TURNOVER RISK. The Fund has an
investment strategy that may frequently involve buying and selling portfolio
securities. High portfolio turnover may result in the Fund paying higher levels
of transaction costs, including brokerage commissions, dealer mark-ups and other
costs and may generate greater tax liabilities for shareholders. Portfolio
turnover risk may cause the Fund’s performance to be less than
expected.
PREMIUM/DISCOUNT
RISK. The market price
of the Fund’s shares will generally fluctuate in accordance with changes in the
Fund’s net asset value as well as the relative supply of and demand for shares
on the Exchange. First Trust cannot predict whether shares will trade below, at
or above their net asset value because the shares trade on the Exchange at
market prices and not at net asset value. Price differences may be due, in large
part, to the fact that supply and demand forces at work in the secondary trading
market for shares will be closely related, but not identical, to the same forces
influencing the prices of the holdings of the Fund trading individually or in
the aggregate at any point in time. However, given that shares can only be
purchased and redeemed in Creation Units, and only to and from broker-dealers
and large institutional investors that have entered into participation
agreements (unlike shares of closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net asset
value), First Trust believes that large discounts or premiums to the net asset
value of shares should not be sustained absent disruptions to the creation and
redemption mechanism, extreme market volatility or potential lack of authorized
participants. During stressed market conditions, the market for the Fund’s
shares may become less liquid in response to deteriorating liquidity in the
market for the Fund’s underlying portfolio holdings, which could in turn lead to
differences between the market price of the Fund’s shares and their net asset
value.
RESTRICTED
SECURITIES RISK.
Restricted securities are securities that cannot be offered for public resale
unless registered under the applicable securities laws or that have a
contractual restriction that prohibits or limits their resale. Restricted
securities include private placement securities that have not been registered
under the applicable securities laws, such as Rule 144A securities, and
securities of U.S. and non-U.S. issuers that are issued pursuant to Regulation
S. Private placements are generally subject to strict restrictions on resale.
Restricted securities may be illiquid as they generally are not listed on an
exchange and may have no active trading market. The Fund may be unable to sell a
restricted security on short notice or may be able to sell them only at a price
below current value. It may be more difficult to determine a market value for a
restricted security. Also, the Fund may get limited information about the issuer
of a restricted security, so it may be less able to predict a loss. In addition,
if Fund management receives material non-public information about the issuer,
the Fund may as a result be unable to sell the securities. Certain restricted
securities may involve a high degree of business and financial risk and may
result in substantial losses.
SMALLER
COMPANIES RISK. The stock price of
small and/or mid capitalization companies may be more volatile than those of
larger companies and therefore the Fund’s share price may be more volatile than
those of funds that invest a larger percentage of their assets in stocks issued
by large capitalization companies. Stock prices of small and/or mid
capitalization companies are also generally more vulnerable than those of large
capitalization companies to adverse business and economic developments.
Securities of small and/or mid capitalization companies may be thinly traded,
making it difficult for the Fund to buy and sell them. In addition, small and/or
mid capitalization companies are typically less financially stable than larger,
more established companies and may reinvest a high proportion of their earnings
in their business and may not pay dividends. Small and/or mid capitalization
companies may also depend on a small number of essential personnel who may also
be less experienced than the management of larger companies, making these
companies more vulnerable to experiencing adverse
16
effects
due to the loss or inexperience of personnel. Small and/or mid capitalization
companies also normally have less diverse product lines than
those of large capitalization companies and are more susceptible to adverse
developments concerning their products.
TRADING
ISSUES RISK. Trading in
Fund shares on the Exchange may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in shares inadvisable.
In addition, trading in Fund shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to the Exchange’s “circuit
breaker” rules. There can be no assurance that the requirements of the Exchange
necessary to maintain the listing of the Fund will continue to be met or will
remain unchanged. The Fund may have difficulty maintaining its listing on the
Exchange in the event the Fund’s assets are small, the Fund does not have enough
shareholders, or if the Fund is unable to proceed with creation and/or
redemption orders.
Non-Principal
Risks
BORROWING
AND LEVERAGE RISK. If
the Fund borrows money, it must pay interest and other fees, which may reduce
the Fund’s returns. Any such borrowings are intended to be temporary. However,
under certain market conditions, including periods of decreased liquidity, such
borrowings might be outstanding for longer periods of time. As prescribed by the
1940 Act, the Fund will be required to maintain specified asset coverage of at
least 300% with respect to any bank borrowing immediately following such
borrowing and at all times thereafter. The Fund may be required to dispose of
assets on unfavorable terms if market fluctuations or other factors reduce the
Fund’s asset coverage to less than the prescribed amount.
CASH
TRANSACTIONS RISK. The Fund may, under
certain circumstances, effect a portion of its creations and redemptions for
cash, rather than in-kind. As a result, an investment in the Fund may be less
tax-efficient than an investment in an exchange-traded fund ("ETF") that effects its
creations and redemptions only in-kind. ETFs are able to make in-kind
redemptions and avoid being taxed on gains on the distributed portfolio
securities at the fund level. A Fund that effects redemptions for cash may be
required to sell portfolio securities in order to obtain the cash needed to
distribute redemption proceeds. Any recognized gain on these sales by the Fund
will generally cause the Fund to recognize gain it might not otherwise have
recognized, or to recognize such gain sooner than would otherwise be required if
it were to distribute portfolio securities only in-kind. The Fund generally
intends to distribute these gains to shareholders to avoid being taxed on this
gain at the fund level and otherwise comply with the special tax rules that
apply to it. This strategy may cause shareholders to be subject to tax on gains
they would not otherwise be subject to, or at an earlier date than if they had
made an investment in a different ETF. Moreover, cash transactions may have to
be carried out over several days if the securities market is relatively
illiquid, and may involve considerable brokerage fees and taxes. These brokerage
fees and taxes, which will be higher than if the Fund sold and redeemed its
shares in-kind, will be passed on to purchasers and redeemers of Creation Units
in the form of creation and redemption transaction fees. In addition, these
factors may result in wider spreads between the bid and the offered prices of
the Fund's shares than for ETFs that distribute portfolio securities
in-kind.
FAILURE
TO QUALIFY AS A REGULATED INVESTMENT COMPANY RISK. If, in any year, the Fund fails to
qualify as a regulated investment company under the applicable tax laws, the
Fund would be taxed as an ordinary corporation. In such circumstances, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying as a regulated
investment company that is accorded special tax treatment.
INTELLECTUAL
PROPERTY RISK. The Fund relies on a
license and related sublicense that permits the Fund to use its Index and
associated trade names, trademarks and service marks (the “Intellectual
Property”) in connection with
the name and investment strategies of the Fund. Such license and related
sublicense may be terminated by the Index Provider, and, as a result, the Fund
may lose its ability to use the Intellectual Property. There is also no
guarantee that the Index Provider has all rights to license the Intellectual
Property for use by the Fund. Accordingly, in the event the license is
terminated or the Index Provider does not have rights to license the
Intellectual Property, it may have a significant effect on the operation of the
Fund.
INTERNATIONAL
CLOSED MARKET TRADING RISK. Because securities
held by the Fund trade on non-U.S. exchanges that are closed when the Fund's
primary listing exchange is open, there are likely to be deviations between the
current price of an underlying security and the last quoted price for the
underlying security (i.e., the Fund’s quote
from the closed foreign market), resulting in premiums or discounts to the
Fund's net asset value that may be greater than those experienced by other
exchange-traded funds. However, because shares can be created and redeemed in
Creation Units at the Fund's net asset value, it is not expected that large
discounts or premiums to the net asset value of the Fund will be sustained over
the long term (unlike shares of many closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net asset
values).
17
ISSUER
SPECIFIC CHANGES RISK. The value of an
individual security or particular type of security can be more volatile than the
market as a whole and can perform differently from the value of the market as a
whole.
LEGISLATION/LITIGATION
RISK.
From time to time, various legislative initiatives are proposed in the United
States and abroad, which may have a negative impact on certain companies in
which the Fund invests. In addition, litigation regarding any of the issuers of
the securities owned by the Fund, or industries represented by these issuers,
may negatively impact the value of the securities. Such legislation or
litigation may cause the Fund to lose value or may result in higher portfolio
turnover if the Advisor determines to sell such a holding.
REPURCHASE
AGREEMENT RISK. The Fund
may enter into repurchase agreements. A repurchase agreement is an agreement to
purchase a security from a party at one price and a simultaneous agreement to
sell it back to the original party at an agreed-upon price, typically
representing the purchase price plus interest. Repurchase agreements may be
viewed as loans made by the Fund which are collateralized by the securities
subject to repurchase. The Fund's investment return on such transactions will
depend on the counterparty's willingness and ability to perform its obligations
under a repurchase agreement. If the Fund's counterparty should default on its
obligations and the Fund is delayed or prevented from recovering the collateral,
or if the value of the collateral is insufficient, the Fund may have to borrow
cash, subject to certain legal limits, or realize a loss.
Fund
Organization
The
Fund is a series of the Trust, an investment company registered under the 1940
Act. The Fund is treated as a separate fund with its own
investment objective and policies. The Trust is organized as a Massachusetts
business trust. The Board is responsible for the overall management and
direction of the Trust. The Board elects the Trust’s officers and approves all
significant agreements, including those with the Advisor, custodian and fund
administrative and accounting agent.
Management
of the Fund
First
Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois 60187, is the
investment advisor to the Fund. In this capacity, First Trust is
responsible for the selection and ongoing monitoring of the securities in the
Fund’s portfolio and certain other services necessary for the management of the
portfolio.
First
Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace
Partners of DuPage L.P. is a limited partnership with one general partner, The
Charger Corporation, and a number of limited partners. The Charger Corporation
is an Illinois corporation controlled by James A. Bowen, the Chief Executive
Officer of First Trust. First Trust discharges its responsibilities subject to
the policies of the Board.
First Trust serves
as advisor or sub-advisor for 8 mutual fund portfolios, 10
exchange-traded funds consisting of 193 series and 16 closed-end funds. It is
also the portfolio supervisor of certain unit investment trusts sponsored by
First Trust Portfolios L.P. (“FTP”), an affiliate of First Trust, 120
East Liberty Drive, Wheaton, Illinois 60187. FTP specializes in the
underwriting, trading and distribution of unit investment trusts and other
securities. FTP is the principal underwriter of the shares of the
Fund.
There is no one
individual primarily responsible for portfolio management decisions for the
Fund. Investments are made under the direction of the Investment
Committee. The Investment Committee consists of Daniel J. Lindquist, Jon C.
Erickson, David G. McGarel, Roger F. Testin, Stan Ueland, Chris A. Peterson and
Erik Russo.
•
Mr. Lindquist is
Chairman of the Investment Committee and presides over Investment Committee
meetings. Mr. Lindquist is responsible for overseeing the implementation of the
Fund’s investment strategy. Mr. Lindquist was a Senior Vice President of First
Trust and FTP from September 2005 to July 2012 and is now a Managing Director of
First Trust and FTP. Mr. Lindquist is a recipient of the Chartered Financial
Analyst designation.
•
Mr. Erickson joined
First Trust in 1994 and is a Senior Vice President of First Trust and FTP. As
the head of First Trust’s Equity Research Group, Mr. Erickson is responsible for
determining the securities to be purchased and sold by funds that do not utilize
quantitative investment strategies. Mr. Erickson is a recipient of the Chartered
Financial Analyst designation.
•
Mr. McGarel is the
Chief Investment Officer, Chief Operating Officer and a Managing Director of
First Trust and FTP. As First Trust’s Chief Investment Officer, Mr. McGarel
consults with the other members of the Investment
18
Committee
on market conditions and First Trust’s general investment philosophy. Mr.
McGarel was a Senior Vice President of
First Trust and FTP from January 2004 to July 2012. Mr. McGarel is a recipient
of the Chartered Financial Analyst designation.
•
Mr. Testin is a
Senior Vice President of First Trust and FTP. Mr. Testin is the head of First
Trust’s Portfolio Management Group. Mr. Testin has been a Senior Vice President
of First Trust and FTP since November 2003. Mr. Testin is a recipient of the
Chartered Financial Analyst designation.
•
Mr. Ueland joined
First Trust as a Vice President in August 2005 and has been a Senior Vice
President of First Trust and FTP since September 2012. At First Trust, he plays
an important role in executing the investment strategies of each portfolio of
exchange-traded funds advised by First Trust.
•
Mr. Peterson is a
Senior Vice President and head of First Trust’s strategy research group. He
joined First Trust in January of 2000. Mr. Peterson is responsible for
developing and implementing quantitative equity investment strategies. Mr.
Peterson received his B.S. in Finance from Bradley University in 1997 and his
M.B.A. from the University of Chicago Booth School of Business in 2005. He has
over 20 years of financial services industry experience and is a recipient of
the Chartered Financial Analyst designation.
•
Mr. Russo is a Vice President of
First Trust. He is responsible for implementing the investment strategies of
each portfolio of exchange-traded funds advised by First Trust in his role as a
Portfolio Manager. Mr. Russo joined First Trust in January of
2010.
For
additional information concerning First Trust, including a description of the
services provided to the Fund, see the Fund's SAI. Additional
information about the compensation of Investment Committee members, other
accounts managed by members of the Investment Committee and ownership by members
of the Investment Committee of shares of the Fund is provided in the
SAI.
Management
Fee
Pursuant to an
investment management agreement between First Trust and the Trust, on behalf of
the Fund (the “Investment
Management Agreement”),
First Trust manages the investment of the Fund's assets. First Trust is paid an
annual management fee by the Fund equal to 0.70% of the Fund's average daily net
assets and is responsible for the Fund's expenses, 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, 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.
A discussion
regarding the Board’s approval of the continuation of the Investment
Management Agreement is available in the Fund’s Annual Report to Shareholders
for the year ended September 30, 2021.
How
to Buy and Sell Shares
Most investors buy
and sell shares of the Fund in secondary market transactions through brokers.
Shares of the Fund are listed for trading on the secondary market
on one or more national securities exchanges. Shares can be bought and sold
throughout the trading day like other publicly traded shares. There is no
minimum investment when buying shares on the Exchange. Although shares are
generally purchased and sold in “round lots” of 100 shares, brokerage firms
typically permit investors to purchase or sell shares in smaller “odd lots,” at
no per-share price differential. When buying or selling shares through a broker,
investors should expect to pay brokerage commissions, investors may receive less
than the net asset value of the shares because shares are bought and sold at
market prices rather than at net asset value, and investors may pay some or all
of the bid-ask spread for each transaction (purchase or sale) of Fund shares.
Share prices are reported in dollars and cents per share.
Under normal
circumstances, the Fund will pay out redemption proceeds to a redeeming
authorized participant within two days after the authorized
participant’s redemption request is received, in accordance with the process set
forth in the Fund’s SAI and in the agreement between the authorized participant
and the Fund’s distributor. However, the Fund reserves the right, including
under stressed market conditions, to take up to seven days after the receipt of
a redemption request to pay an authorized participant, all as permitted by the
1940 Act. If the Fund has foreign investments in a country where a local market
holiday, or series of consecutive holidays, or the extended delivery cycles for
transferring foreign investments to redeeming authorized participants prevents
the Fund from delivering such foreign investments to an authorized participant
in response to a redemption request, the Fund may take up to 15 days after the
receipt of the redemption request to deliver such investments to the authorized
participant.
19
For purposes of the
1940 Act, the Fund is treated as a registered investment company,
and the acquisition of
shares by other registered investment companies and companies relying on
Sections 3(c)(1) or 3(c)(7) of the 1940 Act is subject to the restrictions of
Section 12(d)(1) of the 1940 Act and the related rules and
interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is
the record owner of all outstanding shares of the Fund and is recognized as the
owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all
shares. Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book-entry or “street name” form.
Share
Trading Prices
The trading price of
shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and can be affected
by market forces of supply and demand, economic conditions and other
factors.
Frequent
Purchases and Redemptions of the Fund's Shares
The
Fund imposes no restrictions on the frequency of purchases and redemptions
(“market
timing”). In determining not
to approve a written, established policy, the Board evaluated the risks of
market timing activities by the Fund's shareholders. The Board considered that
the Fund's shares can only be purchased and redeemed directly from the Fund in
Creation Units by broker-dealers and large institutional investors that have
entered into participation agreements (i.e., authorized
participants (“APs”)) and that the vast
majority of trading in the Fund's shares occurs on the secondary market. Because
the secondary market trades do not involve the Fund directly, it is unlikely
those trades would cause many of the harmful effects of market timing, including
dilution, disruption of portfolio management, increases in the Fund's trading
costs and the realization of capital gains. With respect to trades directly with
the Fund, to the extent effected in-kind (i.e., for securities), those trades do
not cause any of the harmful effects that may result from frequent cash trades.
To the extent that the Fund may effect the purchase or redemption of Creation
Units in exchange wholly or partially for cash, the Board noted that such trades
could result in dilution to the Fund and increased transaction costs, which
could negatively impact the Fund's ability to achieve its investment objective.
However, the Board noted that direct trading by APs is critical to ensuring that
the shares trade at or close to net asset value. In addition, the Fund imposes
fixed and variable transaction fees on purchases and redemptions of Creation
Units to cover the custodial and other costs incurred by the Fund in effecting
trades. Finally, the Advisor monitors purchase and redemption orders from APs
for patterns of abusive trading and the Fund reserves the right to not accept
orders from APs that the Advisor has determined may be disruptive to the
management of the Fund, or otherwise not in the Fund's best
interests.
Dividends,
Distributions and Taxes
Dividends
from net investment income, if any, are declared and paid quarterly by the Fund.
The Fund distributes its net realized capital gains, if
any, to shareholders at least annually.
Distributions
in cash may be reinvested automatically in additional whole shares only if the
broker through whom you purchased shares makes such
option available. Such shares will generally be reinvested by the broker based
upon the market price of those shares and investors may be subject to customary
brokerage commissions charged by the broker.
Federal
Tax Matters
This
section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Fund. This section is current as of the
date of this prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state,
local or non-U.S. tax consequences.
20
This federal income
tax summary is based in part on the advice of counsel to the Fund. The Internal
Revenue Service could disagree with any conclusions set
forth in this section. In addition, counsel to the Fund may not have been asked
to review, and may not have reached a conclusion with respect to, the federal
income tax treatment of the assets to be included in the Fund. The following
disclosure may not be sufficient for you to use for the purpose of avoiding
penalties under federal tax law.
As with any
investment, you should seek advice based on your individual circumstances from
your own tax advisor.
Fund
Status
The
Fund intends to continue to qualify as a “regulated investment company” under
the federal tax laws. If the Fund qualifies as a regulated
investment company and distributes its income as required by the tax law, the
Fund generally will not pay federal income taxes.
Distributions
The
Fund’s distributions are generally taxable. After the end of each year, you will
receive a tax statement that separates the distributions of the
Fund into two categories: ordinary income distributions and capital gain
dividends. Ordinary income distributions are generally taxed at your ordinary
tax rate, however, as further discussed below, certain ordinary income
distributions received from the Fund may be taxed at the capital gains tax
rates. Generally, you will treat all capital gain dividends as long-term capital
gains regardless of how long you have owned your shares.
To determine your
actual tax liability for your capital gain dividends, you must calculate your
total net capital gain or loss for the tax year after considering all of
your other taxable transactions, as described below. In addition, the Fund may
make distributions that represent a return of capital for tax purposes and thus
will generally not be taxable to you; however, such distributions may reduce
your tax basis in your shares, which could result in you having to pay higher
taxes in the future when shares are sold, even if you sell the shares at a loss
from your original investment. A "return of capital" is a return, in whole or in
part, of the funds that you previously invested in the Fund. A return of capital
distribution should not be considered part of a Fund’s dividend yield or total
return of an investment in Fund shares. The tax status of your distributions
from the Fund is not affected by whether you reinvest your distributions in
additional shares or receive them in cash. The income from the Fund that you
must take into account for federal income tax purposes is not reduced by amounts
used to pay a deferred sales fee, if any. The tax laws may require you to treat
distributions made to you in January as if you had received them on December 31
of the previous year.
Income
from the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally
applies to your net investment income if your adjusted
gross income exceeds certain threshold amounts, which are $250,000 in the case
of married couples filing joint returns and $200,000 in the case of single
individuals.
Dividends
Received Deduction
A
corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on shares that are attributable to qualifying dividends
received by the Fund from certain corporations may be reported by the Fund as
being eligible for the dividends received deduction.
Capital
Gains and Losses and Certain Ordinary Income Dividends
If you are an
individual, the maximum marginal stated federal tax rate for net capital gain is
generally 20% (15% or 0% for taxpayers with taxable incomes below
certain thresholds). Some capital gains, including some portion of your capital
gain dividends, may be taxed at a higher maximum stated tax rate. Capital gains
may also be subject to the Medicare tax described above.
Net capital gain
equals net long-term capital gain minus net short-term capital loss for the
taxable year. Capital gain or loss is long-term if the holding period for
the asset is more than one year and is short-term if the holding period for the
asset is one year or less. You must exclude the date you purchase your shares to
determine your holding period. However, if you receive a capital gain dividend
from the Fund and sell your shares at a loss after holding it for six months or
less, the loss will be recharacterized as long-term capital loss to the extent
of the capital gain dividend received. The tax rates for capital gains realized
from assets held for one year or less are generally the same as for ordinary
income. The Internal Revenue Code of 1986, as amended, treats certain capital
gains as ordinary income in special situations.
21
An election may be
available to you to defer recognition of the gain attributable to a capital gain
dividend if you make certain qualifying investments within a
limited time. You should talk to your tax advisor about the availability of this
deferral election and its requirements.
Ordinary
income dividends received by an individual shareholder from a regulated
investment company such as the Fund are generally taxed at
the same rates that apply to net capital gain (as discussed above), provided
certain holding period requirements are satisfied and provided the dividends are
attributable to qualifying dividends received by the Fund itself. The Fund will
provide notice to its shareholders of the amount of any distribution which may
be taken into account as a dividend which is eligible for the capital gains tax
rates.
Sale
of Shares
If you sell or
redeem your shares, you will generally recognize a taxable gain or loss. To
determine the amount of this gain or loss, you must subtract your tax
basis in your shares from the amount you receive in the transaction. Your tax
basis in your shares is generally equal to the cost of your shares, generally
including sales charges. In some cases, however, you may have to adjust your tax
basis after you purchase your shares. An election may be available to you to
defer recognition of capital gain if you make certain qualifying investments
within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Taxes
on Purchase and Redemption of Creation Units
If
you exchange securities for Creation Units, you will generally recognize a gain
or a loss. The gain or loss will be equal to the difference between
the market value of the Creation Units at the time and your aggregate basis in
the securities surrendered and the cash component paid. If you exchange Creation
Units for securities, you will generally recognize a gain or loss equal to the
difference between your basis in the Creation Units and the aggregate market
value of the securities received and the cash redemption amount. The Internal
Revenue Service, however, may assert that a loss realized upon an exchange of
securities for Creation Units or Creation Units for securities cannot be
deducted currently under the rules governing “wash sales,” or on the basis that
there has been no significant change in economic position.
Treatment
of Fund Expenses
Expenses incurred and
deducted by the Fund will generally not be treated as income taxable to
you.
Non-U.S.
Tax Credit
Because
the Fund may invest in non-U.S. securities, the tax statement that you receive
may include an item showing non-U.S. taxes the Fund paid
to other countries. In this case, dividends taxed to you will include your share
of the taxes the Fund paid to other countries. You may be able to deduct or
receive a tax credit for your share of these taxes.
Non-U.S.
Investors
If
you are a non-U.S. investor (i.e., an investor other
than a U.S. citizen or resident or a U.S. corporation, partnership, estate or
trust), you should be aware that, generally, subject to applicable tax treaties,
distributions from the Fund will be characterized as dividends for federal
income tax purposes (other than dividends which the Fund properly reports as
capital gain dividends) and will be subject to U.S. federal income taxes,
including withholding taxes, subject to certain exceptions described below.
However, distributions received by a non-U.S. investor from the Fund that are
properly reported by the Fund as capital gain dividends may not be subject to
U.S. federal income taxes, including withholding taxes, provided that the Fund
makes certain elections and certain other conditions are met. Distributions from
the Fund that are properly reported by the Fund as an interest-related dividend
attributable to certain interest income received by the Fund or as a short-term
capital gain dividend attributable to certain net short-term capital gain income
received by the Fund may not be subject to U.S. federal income taxes, including
withholding taxes when received by certain non-U.S. investors, provided that the
Fund makes certain elections and certain other conditions are met.
Distributions
may be subject to a U.S. withholding tax of 30% in the case of distributions to
(i) certain non-U.S. financial institutions that
have not entered into an agreement with the U.S. Treasury to collect and
disclose certain information and are not resident in a jurisdiction that has
entered into such an agreement with the U.S. Treasury and (ii) certain other
non-U.S.
22
entities that do not
provide certain certifications and information about the entity’s U.S.
owners.This withholding
tax is also currently scheduled to apply to the gross proceeds from the
disposition of securities that produce U.S. source interest or dividends. However, proposed
regulations may eliminate the requirement to withhold on payments of gross
proceeds from dispositions.
It is the responsibility of the entity through which you hold your shares to determine the applicable withholding.
It is the responsibility of the entity through which you hold your shares to determine the applicable withholding.
Investments
in Certain Non-U.S. Corporations
If the Fund holds an
equity interest in any “passive foreign investment
companies” (“PFICs”), which are generally certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, certain rents and royalties
or capital gains) or that hold at least 50% of their assets in investments
producing such passive income, the Fund could be subject to U.S. federal income
tax and additional interest charges on gains and certain distributions with
respect to those equity interests, even if all the income or gain is timely
distributed to its shareholders. The Fund will not be able to pass through to
its shareholders any credit or deduction for such taxes. The Fund may be able to
make an election that could ameliorate these adverse tax consequences. In this
case, the Fund would recognize as ordinary income any increase in the value of
such PFIC shares, and as ordinary loss any decrease in such value to the extent
it did not exceed prior increases included in income. Under this election, the
Fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during
that year, and such income would nevertheless be subject to the distribution
requirement and would be taken into account for purposes of the 4% excise tax.
Dividends paid by PFICs are not treated as qualified dividend
income.
Distribution
Plan
FTP
serves as the distributor of Creation Units for the Fund on an agency basis. FTP
does not maintain a secondary market in shares.
The
Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. In accordance with the Rule 12b-1 plan, the
Fund is authorized to pay an amount up to 0.25% of its average daily net assets
each year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional
services.
The Fund does not
currently pay 12b-1 fees, and pursuant to a contractual arrangement, the Fund
will not pay 12b-1 fees any time before January 31, 2023.
However, in the event 12b-1 fees are charged in the future, because these fees
are paid out of the Fund's assets, over time these fees will increase the cost
of your investment and may cost you more than certain other types of sales
charges.
Net
Asset Value
The
Fund's net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern Time) on each day the New York Stock Exchange
("NYSE") is open for
trading. If the NYSE closes early on a valuation day, the Fund’s net asset value
will be determined as of that time. Net asset value per share is calculated for
the Fund by taking the market price of the Fund’s total assets, including
interest or dividends accrued but not yet collected, less all liabilities
(including accrued expenses and dividends declared but unpaid), and dividing
such amount by the total number of shares outstanding. The result, rounded to
the nearest cent, is the net asset value per share. All valuations are subject
to review by the Board or its delegate.
The 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, in
accordance with valuation procedures adopted by the Board and in accordance with
the 1940 Act. Portfolio securities listed on any exchange other than Nasdaq and
the London Stock Exchange Alternative Investment Market (“AIM”) are valued at the last sale price
on the business day as of which such value is being determined. Securities
listed on Nasdaq or AIM are valued at the official closing price on the business
day as of which such value is being determined. If there has been no sale on
such day, or no official closing price in the case of securities traded on
Nasdaq or AIM, the securities are fair valued at the mean of the most recent bid
and ask prices on such day.
Portfolio
securities traded on more than one securities exchange are valued at the last
sale price or official closing price, as applicable, on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. For securities
traded on an exchange that provides both an official closing price and a last
sale
23
price, the Advisor's
Pricing Committee, at its discretion, shall determine to use either the last
sale price or the official closing price, depending on which price
reflects the appropriate market value. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on Nasdaq or AIM, are
fair valued at the mean of the most recent bid and asked price, if available,
and otherwise at the closing bid price. Short-term investments that mature in
less than 60 days when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discount, provided the Advisor’s
Pricing Committee has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions
existing at the time of determination. Net asset value may change on days when
investors may not sell or redeem Fund shares.
Certain
securities may not be able to be priced by pre-established pricing methods. Such
securities may be valued by the Board or its delegate, the
Advisor’s Pricing Committee, at fair value. The use of fair value pricing by the
Fund is governed by valuation procedures adopted by the Board and in accordance
with the provisions of the 1940 Act. These securities generally include, but are
not limited to, certain restricted securities (securities which may not be
publicly sold without registration under the Securities Act of 1933) for which a
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 the Fund's
net asset value or make it difficult or impossible to obtain a reliable market
quotation; and a security whose price, as provided by the pricing service, does
not reflect the security’s fair value. As a general principle, the current fair
value of a security would appear to be the amount which the owner might
reasonably expect to receive for the security upon its current sale. When fair
value prices are used, generally they will differ from the current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities. See
the Fund's SAI for details.
Because
foreign securities exchanges may be open on different days than the days during
which an investor may purchase or sell the shares of
the Fund, the value of the Fund's securities may change on days when investors
are not able to purchase or sell the shares of the Fund. The value of securities
denominated in foreign currencies is converted into U.S. dollars at the exchange
rates in effect at the time of valuation. Any use of a different rate from the
rates used by the Index may adversely affect the Fund’s ability to track the
Index.
Fund
Service Providers
The Bank of New York
Mellon, 240 Greenwich Street, New York, New York 10286, acts as the
administrator, custodian and fund accounting and transfer agent
for the Fund. Chapman and Cutler LLP, 320 S. Canal St., Chicago, Illinois 60606,
serves as legal counsel to the Fund. First Trust serves as the fund reporting
agent for the Fund.
Index
Provider
The
Index is compiled by the Index Provider. The Index Provider is not affiliated
with the Fund, First Trust or FTP. The Fund is entitled to use the
Index pursuant to a sublicensing arrangement with First Trust, which in turn has
a licensing agreement with the Index Provider. Solactive AG serves as
calculation agent for the Index (the “Index
Calculation Agent”). The Index
Calculation Agent is responsible for the management of the day-to-day operations
of the Index, including calculating the value of the Index every 15 seconds,
widely disseminating the Index values every 15 seconds and tracking corporate
actions, some of which result in Index adjustments.
Disclaimers
First
Trust does not guarantee the accuracy and/or the completeness of the Index or
any data included therein, and First Trust shall have no
liability for any errors, omissions or interruptions therein. First Trust makes
no warranty, express or implied, as to results to be obtained by the Fund,
owners of the shares of the Fund or any other person or entity from the use of
the Index or any data included therein. First Trust makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or fitness
for a particular purpose or use with respect to the Index or any data included
therein. Without limiting any of the foregoing, in no event shall First Trust
have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits) arising out of matters relating to the use of
the Index, even if notified of the possibility of such damages.
The
Fund is not sponsored, endorsed, sold or promoted by IPOX® Schuster LLC.
IPOX® Schuster LLC makes
no representation or warranty, express or implied, to the owners of the Fund or
any member of the public regarding the advisability of trading
24
in
the Fund. IPOX®’s only relationship
to First Trust is the licensing of certain trademarks and trade names of
IPOX® and of the
IPOX® 100 Europe Index,
which is determined, composed and calculated without regard to First Trust or
the Fund.
IPOX® IS A REGISTERED
INTERNATIONAL TRADEMARK OF IPOX® SCHUSTER LLC AND
IPOX® SCHUSTER,
IPOX®-100 AND
IPOX®-30 ARE TRADEMARKS
AND SERVICE MARKS OF IPOX® SCHUSTER LLC
(WWW.IPOX.COM) AND HAVE BEEN LICENSED FOR CERTAIN PURPOSES FROM IPOX® SCHUSTER LLC TO
FIRST TRUST PURSUANT TO THE PRODUCT LICENSE AGREEMENT.
A
patent with respect to the IPOX® Schuster LLC index
methodology has been issued (U.S. Pat. No. 7,698,197). IPOX® is a registered
international trademark of IPOX® Schuster LLC
(www.ipox.com).
Premium/Discount
Information
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.
Total
Return Information
The table below compares the total return
of the Fund to the total return of the Index on which it is based and a market
index. The information presented for the Fund is for the period
indicated.
“Average annual
total returns” represent the average annual change in the value of an investment
over the period indicated. “Cumulative total returns” represent
the total change in value of an investment over the period indicated. The return
information shown under “Annual Total Return” in the Fund’s summary prospectus
represents the average annual total returns of the Fund as of the calendar year
end, while the information presented below is as of the Fund’s fiscal year end.
The net asset value per share of the Fund 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 liabilities (including accrued expenses
and dividends declared but unpaid), by the total number of outstanding shares.
The net asset value return is based on the net asset value per share of the Fund
and the market return is based on the market price per share of the Fund. 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 net
asset value 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 net asset value is calculated. Prior to January 1,
2019, the price used was the midpoint between the highest bid and the lowest
offer on the stock exchange on which shares of the Fund were listed for trading
as of the time that the Fund's net asset value was calculated. Since the shares
of the Fund typically do not trade in the secondary market until several days
after the Fund's inception, for the period from inception to the first day of
secondary market trading in shares of the Fund, the net asset value of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. Market and net asset value returns assume that all distributions have
been reinvested in the Fund at Market Price and net asset value, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, an index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns reflect the reinvestment of dividends on securities in
the index. The returns shown in the table below do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of shares of the Fund. The investment return and principal value of shares
of the Fund will vary with changes in market conditions. Shares of the Fund may
be worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future results.
25
First
Trust IPOX® Europe Equity
Opportunities ETF (FPXE)
Total Returns as of September 30, 2021
Total Returns as of September 30, 2021
|
|
|
Average
Annual |
Cumulative |
|
|
1
Year |
Inception
(10/4/2018) |
Inception
(10/4/2018) |
|
Fund
Performance |
|
|
|
|
Net Asset
Value |
24.19% |
17.39% |
61.47% |
|
Market
Price |
23.63% |
17.41% |
61.56% |
|
Index
Performance |
|
|
|
|
IPOX® 100 Europe
Index |
25.58% |
18.87% |
67.66% |
|
MSCI Europe
Index |
27.25% |
8.44% |
27.39% |
26
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the periods shown. Certain information reflects financial
results for a single share of the Fund. The total returns represent the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). The information for
the periods indicated has been derived from financial statements audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial
statements, is included in the Annual Report to Shareholders dated September 30,
2021 and is incorporated by reference in the Fund's SAI, which is available upon
request.
First
Trust Exchange-Traded Fund II
Financial
Highlights
For a share outstanding throughout each period
For a share outstanding throughout each period
First
Trust IPOX®
Europe Equity Opportunities ETF (FPXE)
|
|
Year
Ended September 30, |
Period
Ended
9/30/2019
(a) | |
|
|
2021 |
2020 | |
|
Net
asset value, beginning of period |
$24.88 |
$19.66 |
$19.70 |
|
Income
from investment operations: |
|
|
|
|
Net
investment income (loss) |
0.25 |
0.22 |
0.33 |
|
Net
realized and unrealized gain (loss) |
5.75 |
5.30 |
(0.06) |
|
Total
from investment operations |
6.00 |
5.52 |
0.27 |
|
Distributions
paid to shareholders from: |
|
|
|
|
Net
investment income |
(0.33) |
(0.30) |
(0.31) |
|
Net
asset value, end of period |
$30.55 |
$24.88 |
$19.66 |
|
Total
Return (b) |
24.19% |
28.33% |
1.32% |
|
Ratios/supplemental
data: |
|
|
|
|
Net assets,
end of period (in 000’s) |
$10,692 |
$2,488 |
$1,966 |
|
Ratios
to average net assets: |
|
|
|
|
Ratio of
total expenses to average net assets |
0.70% |
0.70% |
(c)0.70% |
|
Ratio of
net investment income (loss) to average net assets |
0.51% |
0.74% |
(c)1.77% |
|
Portfolio
turnover rate (d)
|
118% |
63% |
67% |
(a)
Inception date
is October 4, 2018, which is consistent with the commencement of investment
operations and is the date the initial creation units were
established.
(b)
Total return is
calculated assuming an initial investment made at the net asset value at the
beginning of the period, reinvestment of all distributions at net asset value
during the period, and redemption at net asset value on the last day of the
period. The returns presented do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not
annualized for periods of less than a year.
(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.
27
Other
Information
Continuous
Offering
The
Fund issues, on a continuous offering basis, its shares in one or more groups of
a fixed number of Fund shares (each such group of such
specified number of individual Fund shares, a “Creation
Unit Aggregation”). The method by
which Creation Unit Aggregations of Fund shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of shares are issued and sold by the Fund on an ongoing basis, a
“distribution,” as such term is used in the Securities Act, may occur at any
point. Broker-dealers and other persons are cautioned that some activities on
their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an
order with FTP, breaks them down into constituent shares and sells such shares
directly to customers, or if it chooses to couple the creation of a supply of
new shares with an active selling effort involving solicitation of secondary
market demand for shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a characterization
as an underwriter.
Broker-dealer firms
should also note that dealers who are not “underwriters” but are effecting
transactions in shares, whether or not participating in the
distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(a)(3) of the Securities
Act is not available in respect of such transactions as a result of Section
24(d) of the 1940 Act. As a result, broker-dealer firms should note that dealers
who are not underwriters but are participating in a distribution (as contrasted
with ordinary secondary market transactions) and thus dealing with the shares
that are part of an overallotment within the meaning of Section 4(a)(3)(C) of
the Securities Act would be unable to take advantage of the prospectus delivery
exemption provided by Section 4(a)(3) of the Securities Act. Firms that incur a
prospectus delivery obligation with respect to shares are reminded that, under
the Securities Act Rule 153, a prospectus delivery obligation under Section
5(b)(2) of the Securities Act owed to a broker-dealer in connection with a sale
on the Exchange is satisfied by the fact that the prospectus is available from
the Exchange upon request. The prospectus delivery mechanism provided in Rule
153 is available with respect to transactions on a national securities exchange,
a trading facility or an alternative trading system.
28
|
First
Trust
Exchange-Traded
Fund II |
First Trust IPOX® Europe Equity Opportunities ETF
For
More Information
For
more detailed information on the Fund, several additional sources of information
are available to you. The SAI, incorporated by
reference into this prospectus, contains detailed information on the Fund's
policies and operation. Additional information about the Fund's investments is
available in the annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund's performance during
the last fiscal year. The Fund's most recent SAI, annual and semi-annual reports
and certain other information are available free of charge by calling the Fund
at (800) 621-1675, on the Fund's website at www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You may obtain
this and other information regarding the Fund, including the SAI and the Codes
of Ethics adopted by
First Trust, FTP and the Trust, directly from the Securities and Exchange
Commission (the "SEC"). Information on the SEC’s website
is free of charge. Visit the SEC’s online EDGAR database at www.sec.gov. You may
also request information regarding the Fund by sending a request (along with a
duplication fee) to the SEC by sending an electronic request to
[email protected].
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC File #:
333-143964
811-21944
811-21944