|
First
Trust
Exchange-Traded
Fund IV |
Prospectus
First Trust
Limited Duration Investment Grade Corporate ETF
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Ticker
Symbol: |
FSIG |
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Exchange: |
NYSE
Arca |
First Trust Limited
Duration Investment Grade Corporate ETF (the “Fund”) lists and principally trades its
shares on NYSE Arca, Inc. ("NYSE
Arca" 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 specified blocks of
shares called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund IV (the “Trust”) and an actively
managed exchange-traded 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
March 1,
2023
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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Aquired Fund
Fees and 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
8
9
Calendar Year Total Returns as of 12/31
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|
|
|
|
|
|
|
|
|
|
|
1
Year |
Since
Inception |
Inception
Date |
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Return Before
Taxes |
- |
- |
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Return After
Taxes on Distributions |
- |
- |
|
|
Return After
Taxes on Distributions and Sale of Shares |
- |
- |
|
|
Bloomberg US
Corporate Bond 1-5 Year Index (reflects no deduction for fees,
expenses or
taxes) |
- |
- |
|
Management
Investment
Advisor
First
Trust Advisors L.P. (“First
Trust”
or the “Advisor”)
Portfolio
Managers
The
following persons serve as portfolio managers of the Fund.
•
William Housey, CFA,
Managing Director of Fixed Income and Senior Portfolio Manager of First
Trust
•
Todd Larson, CFA,
Senior Vice President and Portfolio Manager of First Trust
•
Eric R. Maisel, CFA,
Senior Vice President and Portfolio Manager of First Trust
•
Jeffrey Scott, CFA, Senior Vice
President and Portfolio Manager of First
Trust
10
•
Nathan Simons, CFA,
Portfolio Manager of First Trust
•
Scott Skowronski, CFA, Portfolio
Manager of First Trust
The portfolio
managers are primarily and jointly responsible for the day-to-day management of
the Fund. William
Housey, Todd Larson, Eric R. Maisel, Jeffrey Scott, and
Nathan Simons have served as a part of the portfolio management team of the Fund
since November, 2021. Scott Skowronski has served as part of the portfolio
management team of the Fund since November, 2022.
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.
Payments
to Broker-Dealers and Other Financial Intermediaries
If you purchase
shares of the Fund through a broker-dealer, registered investment adviser, bank
or other financial intermediary (collectively, “intermediaries”), 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.
11
Additional
Information on the Fund's Investment Objectives and Strategies
The
Fund is a series of First Trust Exchange-Traded Fund IV and is regulated as an
“investment company” under the Investment Company Act of 1940,
as amended (the "1940
Act").
The Fund is actively managed and does not seek to track the performance of an
index. The Fund’s primary investment objective is to deliver current income. The
Fund’s investment objective is fundamental and may not be changed without
approval by the holders of a majority of the outstanding voting securities of
the Fund. Unless an investment policy is identified as being fundamental, all
investment policies included in this prospectus and the Fund's Statement of
Additional Information (“SAI”) are non-fundamental
and may be changed by the Board of Trustees of the Trust (the “Board”) without shareholder
approval. If there is a material change to the Fund’s principal investment
strategies, you should consider whether the Fund remains an appropriate
investment for you. There is no guarantee that the Fund will achieve its
investment objectives.
The
Fund has adopted a non-fundamental investment policy pursuant to Rule 35d-1
under the 1940 Act (the “Name
Policy”), whereby the Fund,
under normal market conditions, invests at least 80% of its net assets (plus any
borrowings for investment purposes) in investment grade corporate debt
securities. The Name Policy may be changed by the Board without shareholder
approval upon 60 days’ prior written notice.
Additional
Information on the Fund’s Strategy
Under
normal market conditions, the Fund seeks to achieve its objectives by investing
at least 80% of its net assets (plus any borrowings for
investment purposes) in investment grade corporate debt securities. Corporate
debt securities are debt obligations issued by businesses to finance their
operations. Notes, bonds, loans, debentures and commercial paper are the most
common types of corporate debt securities, with the primary differences being
their maturities and secured or unsecured status. Commercial paper has the
shortest term and is usually unsecured. Corporate debt securities may have fixed
or floating interest rates. The corporate debt securities in which the Fund may
investment may include senior loans.
At
least 80% of the Fund’s net assets will be invested in corporate debt securities
that are, at the time of purchase, investment grade (i.e., rated Baa3/BBB- or
above) by at least one nationally recognized statistical rating organization
(“NRSRO”) rating such
securities, or if unrated, debt securities determined by the Advisor to be of
comparable quality. In the case of a split rating between one or more of the
NRSROs, the Fund will consider the highest rating. For an unrated security to be
considered investment grade, the Advisor will consider, at the time of purchase,
whether such security is of comparable quality based on fundamental credit
analysis of the unrated security and comparable securities that are rated by an
NRSRO.
The
Advisor’s investment philosophy is based on the belief that deep fundamental
credit analysis performed by a highly experienced credit
team, within a risk managed framework, will generate higher absolute and
risk-adjusted returns within investment grade debt strategies. This investment
philosophy is expressed by the Advisor through an investment process that
combines rigorous bottom-up fundamental credit analysis and disciplined
portfolio construction. Risk management is a critical component of the entire
process and is embedded in both the fundamental credit analysis and portfolio
construction.
The Advisor’s key
considerations of fundamental credit analysis involve:
•
Evaluation
of Industry Trends: The Advisor tends to
favor industries that are either stable or growing. Moreover, the Advisor
intends to invest in issuers or borrowers that it believes have strong positions
within a given industry.
•
Management
Quality:
The investment process favors companies that have management teams with a sound
track record of managing businesses with and a willingness to reduce leverage.
The Advisor believes strong management teams are typically able to navigate more
challenging business conditions or economic environments in a nimble fashion.
Additionally, the industry analyst will often speak with management teams to
fully understand management’s strategy, the risks inherent in the business and
management’s intentions with respect to the capital structure.
•
Valuation: The investment
process evaluates the enterprise value through time. Importantly, the enterprise
value is assessed not only in a benign credit environment when valuations are
highest, but assuming a recessionary environment when valuations are typically
at their lowest. The investment process favors companies that have strong
valuations so that a positive outcome may be achieved even in a situation when
cash flows deteriorate.
12
•
Consistency
of Cash Flows: The investment
process favors companies that produce relatively stable cash flows through an
economic cycle. The Advisor’s Investment Team believes highly cyclical companies
or capital-intensive industries face a high hurdle. A company’s cash flow is
stressed to determine how resilient the company would be in a downside
case.
The Advisor’s key
considerations of portfolio construction include:
•
Yield
Curve Management: The investment team
continuously monitors market conditions and evaluates macro factors that are the
primary drivers of interest rates. These include economic growth and stage of
the business cycle; the pace, timing, and magnitude of policy decisions; risk
appetite and flow of funds, relative yield levels globally and curve shape,
trend signals and catalysts for change. The information gathered in this
framework informs the outlook for appropriate duration and curve positioning for
the strategy.
•
Relative
Value:
Each approved investment opportunity is evaluated relative to other
opportunities available in the market. This relative value assessment helps
ensure the portfolio is positioned in the credits that offer the best return
relative to risk. The relative value assessment is an ongoing process, as market
prices and the Advisor’s credit outlooks change over time. While analysts are
focused on individual industries, the portfolio managers of the Fund aggregate
this information and make decisions across the entire portfolio, so as to
continually seek to own the best relative value opportunities in the
market.
•
Diversification: Portfolio
diversification is a key component of the portfolio construction process and an
important factor in risk management. The investment process of the Fund’s
Advisor seeks to have a properly diversified portfolio across individual issuers
and industries. However, there may be situations in which the fundamental credit
process utilized by the Fund’s Advisor leads to significant exposure to a
particular industry, in which case the Fund’s Advisor will seek to increase
issuer diversification within the relevant industry.
•
Liquidity: The potential
liquidity of each investment opportunity is analyzed prior to purchase. Through
fundamental credit analysis, the Advisor’s Investment Team can position the
Fund’s portfolio in investment grade debt securities that the Advisor believes
provide the most attractive opportunities in the market.
Within
the investment grade debt markets, there can be significant differences in the
level of secondary market liquidity between individual
bonds. The Advisor will assess the liquidity of an issue prior to purchase to
ensure the appropriate liquidity is maintained in the Fund.
Under
normal market conditions, the Fund seeks to construct a portfolio that has a
weighted average duration of +/- one year of the Bloomberg U.S.
Corporate 1-5 Year Index. Duration is a mathematical calculation of the average
life of a debt security (or portfolio of debt securities) that serves as a
measure of its price risk. In general, each year of duration represents an
expected 1% change in the value of a security for every 1% immediate change in
interest rates. For example, the price of a debt security with a three-year
duration would be expected to drop by approximately 3% in response to a 1%
increase in interest rates. Therefore, prices of debt securities with shorter
durations tend to be less sensitive to interest rate changes than debt
securities with longer durations. As the value of a debt security changes over
time, so will its duration. The Fund’s investment advisor will calculate the
duration of the portfolio by modeling the cash flows of all the individual
holdings, including the impact of prepayment variability and coupon adjustments
where applicable, to determine the duration of each holding and then aggregating
based on the size of the position. In performing this duration calculation, the
Fund’s investment advisor will utilize third-party models.
Securities
in the portfolio may be sold for several reasons, including, but not limited to,
meeting cash needs of the Fund, deterioration in the
fundamental credit quality of an issuer or a change in the relative
attractiveness (relative value) of a security. In instances where the Advisor’s
opinion of the credit quality of an issuer becomes less favorable, securities of
that issuer may become potential sale candidates. Conversely, a security may be
sold in instances where the Advisor’s opinion of the credit quality of an issuer
remains positive, but its valuation has changed such that the Advisor believes
other securities offer a better return for a given level of risk.
Although
the Fund intends to invest primarily in investment grade corporate debt
securities, the Fund may invest up to 20% of its net assets
(plus any borrowings for investment purposes) in debt securities of any credit
quality, including senior loans and other debt securities that are below
investment grade, which are also known as high yield securities, or commonly
referred to as “junk” bonds, or unrated securities that have not been judged by
the Fund’s investment advisor to be of comparable quality to rated investment
grade securities.
13
In
addition, although the Fund intends to invest primarily in investment grade
corporate debt securities, for temporary defensive purposes, the Fund
may depart from its principal investment strategy and invest part or all of its
assets in cash and cash equivalents.
The
Fund is classified as “non-diversified” under the Investment Company Act of
1940, as amended (the “1940
Act”).
The Fund’s investments will be concentrated (i.e., invest more than 25% of Fund
assets) in the industries or group of industries comprising the financials
sector.
Fund
Investments
Principal
Investments
Corporate
Debt Securities
The
Fund may invest in corporate debt securities issued by U.S. companies of all
kinds, including those with small, mid and large
capitalizations. Corporate debt securities are fixed income securities issued by
businesses to finance or expand their operations. Notes, bonds, loans,
debentures and commercial paper are the most common types of corporate debt
securities, with the primary differences being their maturities and secured or
unsecured status. Commercial paper has the shortest term and is usually
unsecured. Corporate debt may be rated investment grade or below investment
grade and may carry fixed or floating rates of interest.
Corporate
debt securities are generally expected to provide periodic payments and the
return of principal at maturity. Holders of corporate debt
securities, as creditors, have a prior legal claim over common and preferred
shareholders as to both income and assets of the issuer for the principal and
interest due them and may have a prior claim over other creditors. The
investment return of corporate debt securities reflects interest on the security
and changes in the market value of the security. The market value of a fixed
rate debt security generally may be expected to rise and fall inversely with
changes in interest rates and also may be affected by the credit rating of the
issuer, the issuer’s performance and perceptions of the issuer in the
marketplace.
High
Yield Debt
The
Fund may invest in debt instruments (e.g., bonds, loans and convertible bonds)
that are rated below investment grade, or unrated securities
deemed by the Advisor to be of comparable quality. Debt securities rated below
investment grade are commonly referred to as “high yield” or “junk” debt. For
purposes of determining whether a security is below investment grade, the
highest available rating will be considered. High yield debt may be issued by
companies without long track records of sales and earnings, or by issuers that
have questionable credit strength. High yield debt and comparable unrated debt
securities: (a) will likely have some quality and protective characteristics
that, in the judgment of the rating agency evaluating the instrument, are out
weighed by large uncertainties or major risk exposures to adverse conditions;
and (b) are predominantly speculative with respect to the issuer’s capacity to
pay dividends or interest and repay principal in accordance with the terms of
the obligation.
Senior
Loans
Senior
loans represent debt obligations of corporate borrowers, that are typically
senior to other obligations of the borrower and generally secured
by a lien on all or some portion of the assets of the borrower. These loans are
often arranged by a syndicate of banks to refinance a borrower’s existing debt,
to finance acquisitions, dividends, leveraged buyouts, and for general corporate
purposes. Senior loans may be acquired by the Fund in whole or through the
purchase of a participation. Senior loans rank at the top of a borrower’s
capital structure in terms of priority of payment, ahead of any subordinated
debt or the borrower’s preferred or common equity. These loans are often
secured, as the holders of these loans typically hold or share a first lien
priority on most if not all of the corporate borrower’s plant, property,
equipment, receivables, cash balances, licenses, trademarks, etc. Senior loans
typically pay interest at rates which are determined periodically on the basis
of a floating base lending rate plus a premium. Senior loans are typically made
to U.S. and, to a lesser extent, non-U.S. corporations, partnerships and other
business entities which operate in various industries and geographical regions.
Senior loans may be investment grade or below investment grade.
The
senior loan market has seen a significant increase in loans with few or none of
the financial maintenance covenants (i.e.,“covenant-lite
loans”)
that have traditionally protected lenders including more aggressive terms that
favor borrowers with respect to restrictions regarding additional debt, payment
terms, income requirements and asset dispositions. A substantial amount of the
senior loans held by the Fund are expected to be covenant-lite loans, meaning
the Fund may be unable to declare
14
an
event of default if financial performance deteriorates, renegotiate the terms of
the loan based upon the elevated risk levels or take other actions
to help mitigate losses.
Non-Principal
Investments
Collateralized
Loan Obligations
A
CLO is a financing company (generally called a “Special
Purpose Vehicle” or “SPV”) created to
reapportion the risk and return characteristics of a pool of assets. CLOs use
funds received from the issuance of debt and equity to acquire a diverse
portfolio of loans that are actively managed by the CLO manager. The debt issued
by CLOs is divided into separate tranches, each of which has a different
risk/return profile based on its priority of claim on the cash flows produced by
the underlying loan pool. The most senior and highest rated tranche has the
lowest yield but is the most loss remote as it has the highest claim on
cash-flow distributions. Mezzanine tranches have higher yields but are more at
risk of loss. The lowest tranche is the equity tranche, which does not have a
coupon and represents a claim on all excess cash flows once the obligations for
each debt tranche have been met. The equity tranche is also the most risky.
While the Funds will not invest in the equity tranche, they may invest in the
mezzanine tranches. The Funds invest in CLOs consisting primarily of first lien
secured loans and not repackaged CLO obligations from other high risk pools. The
underlying loans purchased by CLOs are generally performing at the time of
purchase but may become non-performing, distressed or defaulted. CLOs with
underlying assets of non-performing, distressed or defaulted loans are not
contemplated to comprise a significant portion of a Fund’s investments in
CLOs.
Derivative
Instruments
The
Fund may hold listed derivatives, including futures, options and swaps on
commodities, currencies and financial instruments, or a
basket or index of any of the foregoing. Additionally, the Fund may hold
derivatives traded over-the-counter ("OTC”), including
forwards, swaps, options and swaps on commodities, currencies and financial
instruments, or a basket or index of any of the foregoing. The use of these
derivative transactions may allow the Fund to obtain net long or short exposures
to selected interest rates or durations. The Fund may also utilize derivatives
to enhance return, to hedge some of the risks of its investments in securities,
as a substitute for a position in the underlying asset, to reduce transaction
costs, to maintain full market exposure (which means to adjust the
characteristics of its investments to more closely approximate those of the
markets in which it invests), to manage cash flows, to limit exposure to losses
due to changes to non-U.S. currency exchange rates or to preserve
capital.
To the extent the
Fund enters into derivatives transactions, it will do so pursuant to Rule 18f-4
under the 1940 Act. Rule 18f-4 requires the Fund to implement
certain policies and procedures designed to manage its derivatives risks,
dependent upon the Fund’s level of exposure to derivative
instruments.
Municipal
Securities
Municipal
Securities are debt securities that pay interest that is exempt from regular
federal income taxes. Municipal Securities are generally issued
by or on behalf of states, territories or possessions of the United States and
the District of Columbia and their political subdivisions, agencies, authorities
and other instrumentalities. The types of Municipal Securities in which the Fund
may invest include municipal lease obligations (and certificates of
participation in such obligations), municipal general obligation bonds,
municipal revenue bonds, municipal notes, municipal cash equivalents, private
activity bonds (including without limitation industrial development bonds), and
pre-refunded and escrowed to maturity bonds. In addition, Municipal Securities
include securities issued by tender option bond (“TOB”) trusts and
custodial receipt trusts, each of which are investment vehicles the underlying
assets of which are municipal bonds.
U.S.
Government Securities
The
Fund may invest in U.S. government securities. U.S. government securities
include U.S. Treasury obligations and securities issued or guaranteed
by various agencies of the U.S. government, or by various instrumentalities
which have been established or sponsored by the U.S. government. U.S. Treasury
obligations are backed by the “full faith and credit” of the U.S. government.
Securities issued or guaranteed by federal agencies and U.S. government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the U.S. government.
The
Fund may also invest in callable agency securities, which give the issuer (the
U.S. government agency) the right to redeem the security prior to
maturity. The Fund may also invest in U.S. government inflation-indexed
securities.
15
At
times, the Fund may allocate its investments into direct obligations of the U.S.
government (such as Treasury bonds, bills and notes) and in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including government-sponsored entities.
Cash
Equivalents and Short-Term Investments
The
Fund may invest in short-term debt securities, money market funds and other 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 objectives. The Fund may adopt a defensive strategy when the
portfolio managers believe securities in 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
Fund's 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 certain restricted
securities (securities the disposition of which is restricted under the federal
securities laws), certain investments 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 also available on the Fund's website.
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 objectives. 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 and the
bid/ask spread on the Fund’s shares may widen.
CALL
RISK.
Some debt securities may be redeemed at the option of the issuer, or “called,”
before their stated maturity date. In general, an issuer will call its debt
securities if they can be refinanced by issuing new debt securities which bear a
lower interest rate. The Fund is subject to the possibility that during periods
of falling interest rates an issuer will call its high yielding debt securities.
The Fund would then be forced to invest the unanticipated proceeds at lower
interest rates, likely resulting in a decline in the Fund’s income. Such
redemptions and subsequent reinvestments would also increase the Fund’s
portfolio turnover. If a called debt security was purchased by the Fund at a
premium, the value of the premium may be lost in the event of a
redemption.
CASH
TRANSACTIONS RISK. The Fund will effect
some or all 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 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. The Fund 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 a gain it
16
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 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 entirely in-kind, will be passed on to those
purchasing and redeeming 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.
COVENANT-LITE
LOANS RISK. Substantially all of the senior loans
in which the Fund invests are expected to be covenant-lite loans. The loan
agreement, which sets forth the terms of a loan and the obligations of the
borrower and lender, contains certain covenants that mandate or prohibit certain
borrower actions, including financial covenants that dictate certain minimum and
maximum financial performance levels. Covenants that require the borrower to
maintain certain financial metrics during the life of the loan (such as
maintaining certain levels of cash flow and limiting leverage) are known as
“maintenance covenants.” These covenants are included to permit the lender to
monitor the performance of the borrower and declare an event of default if
breached, allowing the lender to renegotiate the terms of the loan based upon
the elevated risk levels or take other actions to help mitigate losses.
Covenant-lite loans contain fewer or no maintenance covenants making an
investment in these types of loans inherently riskier than an investment in
loans containing provisions allowing the lender reprice credit risk associated
with the borrower or restructure a problematic loan. The Fund’s elevated
exposure to such loans during a downturn in the credit cycle could cause the
Fund to experience outsized losses.
CREDIT
RATING AGENCY RISK.
Credit ratings are determined by credit rating agencies such as S&P Global
Ratings, Moody’s Investors Services, Inc. and Fitch Inc., and are only the
opinions of such entities. Ratings assigned by a rating agency are not absolute
standards of credit quality and do not evaluate market risk or the liquidity of
securities. Any shortcomings or inefficiencies in credit rating agencies’
processes for determining credit ratings may adversely affect the credit ratings
of securities held by the Fund and, as a result, may adversely affect those
securities’ perceived or actual credit risk.
CREDIT
RISK. An
issuer or other obligated party of a debt security may be unable or unwilling to
make dividend, interest and/or principal payments when due. In addition, the
value of a debt security may decline because of concerns about the issuer’s
ability or unwillingness to make such payments. Debt securities are subject to
varying degrees of credit risk which are often reflected in credit ratings. The
credit rating of a debt security may be lowered if the issuer or other obligated
party suffers adverse changes to its financial condition. These adverse changes
may lead to greater volatility in the price of the debt security and affect the
security’s liquidity. High yield and comparable unrated debt securities, while
generally offering higher yields than investment grade debt with similar
maturities, involve greater risks, including the possibility of dividend or
interest deferral, default or bankruptcy, and are regarded as predominantly
speculative with respect to the issuer’s capacity to pay dividends or interest
and repay principal. To the extent that the Fund holds debt securities that are
secured or guaranteed by financial institutions, changes in credit quality of
such financial institutions could cause values of the debt security to
deviate.
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 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
17
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.
DEBT
SECURITIES RISK. Investments in debt
securities subject the holder to the credit risk of the issuer. Credit risk
refers to the possibility that the issuer or other obligor of a security will
not be able or willing to make payments of interest and principal when due.
Generally, the value of debt securities will change inversely with changes in
interest rates. To the extent that interest rates rise, certain underlying
obligations may be paid off substantially slower than originally anticipated and
the value of those securities may fall sharply. During periods of falling
interest rates, the income received by the Fund may decline. If the principal on
a debt security is prepaid before expected, the prepayments of principal may
have to be reinvested in obligations paying interest at lower rates. Debt
securities generally do not trade on a centralized securities exchange making
them generally less liquid and more difficult to value than common stock. The
values of debt securities may also increase or decrease as a result of market
fluctuations, actual or perceived inability or unwillingness of issuers,
guarantors or liquidity providers to make scheduled principal or interest
payments or illiquidity in debt securities markets generally.
EXTENSION
RISK.
Extension risk is the risk that, when interest rates rise, certain obligations
will be paid off by the issuer (or other obligated party) more slowly than
anticipated, causing the value of these debt securities to fall. Rising interest
rates tend to extend the duration of debt securities, making them more sensitive
to changes in interest rates. The value of longer-term debt securities generally
changes more in response to changes in interest rates than shorter-term debt
securities. As a result, in a period of rising interest rates, securities may
exhibit additional volatility and may lose value. Extension risk is particularly
prevalent for a callable debt security where an increase in interest rates could
result in the issuer of that security choosing not to redeem the debt security
as anticipated on the security’s call date. Such a decision by the issuer could
have the effect of lengthening the debt security’s expected maturity, making it
more vulnerable to interest rate risk and reducing its market
value.
FINANCIAL
COMPANIES RISK. Financial companies
are subject to extensive governmental regulation and intervention, which may
adversely affect the scope of their activities, the prices they can charge, the
amount and types of capital they must maintain and, potentially, their size.
Governmental regulation may change frequently and may have significant adverse
consequences for financial companies, including effects not intended by such
regulation. The impact of more stringent capital requirements, or recent or
future regulation in various countries, on any individual financial company or
on financial companies as a whole cannot be predicted. Certain risks may impact
the value of investments in financial companies more severely than those of
investments in other issuers, including the risks associated with companies that
operate with substantial financial leverage. Financial companies may also be
adversely affected by volatility in interest rates, loan losses and other
customer defaults, decreases in the availability of money or asset valuations,
credit rating downgrades and adverse conditions in other related markets.
Insurance companies in particular may be subject to severe price competition
and/or rate regulation, which may have an adverse impact on their profitability.
Financial companies are also a target for cyber attacks and may experience
technology malfunctions and disruptions as a result.
FLOATING
RATE DEBT INSTRUMENTS RISK. Investments in floating rate debt
instruments are subject to the same risks as investments in other types of debt
securities, including credit risk, interest rate risk, liquidity risk and
valuation risk. Floating rate debt instruments include debt securities issued by
corporate and governmental entities, as well as bank loans. Floating rate debt
instruments are structured so that the security’s coupon rate fluctuates based
upon the level of a reference rate. Most commonly, the coupon rate of a floating
rate debt instrument is set at the level of a widely followed interest rate,
plus a fixed spread. As a result, the coupon on floating rate debt instrument
will generally decline in a falling interest rate environment, causing the Fund
to experience a reduction in the income it receives from the instrument. A
floating rate debt instrument’s coupon rate resets periodically according to its
terms. Consequently, in a rising interest rate environment, floating rate debt
instruments with coupon rates that reset infrequently may lag behind the changes
in market interest rates. Floating rate debt instruments may also contain terms
that impose a maximum coupon rate the issuer will pay, regardless of the level
of the reference rate. The Fund may invest in floating rate loans considered to
be high yield, or “junk,” instruments and considered speculative because of the
credit risk of their issuers. Such issuers are more likely than investment grade
issuers to default on their payments of interest and principal owed to the Fund.
An economic downturn would also generally lead to a higher non-payment rate, and
a floating rate debt instrument may lose significant market value before a
default occurs. To the extent the Fund invests in floating rate loans, such
instruments may be subject to legal or contractual restrictions on resale, may
trade infrequently, and their value may be impaired when the Fund needs to
liquidate such securities. It is possible that the collateral securing a
floating rate loan may be insufficient or unavailable to the Fund, and that the
Fund’s rights to collateral
18
may
be limited by bankruptcy or insolvency laws. Additionally, there is no central
clearinghouse for loan trades and the loan market has not
established enforceable settlement standards or remedies for failure to settle.
As such, the secondary market for floating rate loans may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement
periods which may cause the Fund to be unable to realize the full value of its
investment. Lastly, floating rate loans may not be considered “securities,” and
purchasers, such as the Fund, therefore may not be entitled to rely on the
anti-fraud protections of the federal securities laws.
HIGH
YIELD SECURITIES RISK. The Fund’s
investment in high yield securities, or “junk” bonds, may entail increased
credit risks and the risk that the value of the Fund’s assets will decline, and
may decline precipitously, with increases in interest rates. In recent years
there have been wide fluctuations in interest rates and therefore in the value
of debt securities generally. High yield securities are, under most
circumstances, subject to greater market fluctuations and risk of loss of income
and principal than are investments in lower-yielding, higher-rated debt
securities. As interest rates rise, the value of high yield securities may
decline precipitously. Increased rates may also indicate a slowdown in the
economy which may adversely affect the credit of issuers of high yield
securities resulting in a higher incidence of defaults among such issuers. A
slowdown in the economy, or a development adversely affecting an issuer’s
creditworthiness, may result in the issuer being unable to maintain earnings or
sell assets at the rate and at the prices, respectively, that are required to
produce sufficient cash flow to meet its interest and principal requirements.
The Fund’s portfolio managers cannot predict future economic policies or their
consequences or, therefore, the course or extent of any similar market
fluctuations in the future. In addition, high yield securities are generally
less liquid than investment grade securities.
INCOME
RISK.
The Fund’s income may decline when interest rates fall. This decline can occur
because the Fund may subsequently invest in lower-yielding securities as debt
securities in its portfolio mature, are near maturity or are called, or the Fund
otherwise needs to purchase additional debt securities. In addition, the Fund’s
income could decline when the Fund experiences defaults on the debt securities
it holds.
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's shares,
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.
INFLATION
RISK.
Inflation risk is the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the present value of the Fund’s assets and distributions
may decline. This risk is more prevalent with respect to debt securities held by
the Fund. Inflation creates uncertainty over the future real value (after
inflation) of an investment. Inflation rates may change frequently and
drastically as a result of various factors, including unexpected shifts in the
domestic or global economy, and the Fund’s investments may not keep pace with
inflation, which may result in losses to Fund investors.
INTEREST
RATE RISK. The value of debt
securities held by the Fund will fluctuate in value with changes in interest
rates. In general, debt securities will increase in value when interest rates
fall and decrease in value when interest rates rise. The Fund may be subject to
a greater risk of rising interest rates than would normally be the case due to
the current period of historically low rates and the effect of potential
government fiscal policy initiatives and resulting market reaction to those
initiatives. Interest rate risk is generally lower for shorter term investments
and higher for longer term investments. Duration is a common measure of interest
rate risk. Duration measures a debt security’s expected life on a present value
basis, taking into account the debt security’s yield, interest payments and
final maturity. Duration is a reasonably accurate measure of a debt security’s
price sensitivity to changes in interest rates. The longer the duration of a
debt security, the greater the debt security’s price sensitivity is to changes
in interest rates. Rising interest rates also may lengthen the duration of debt
securities with call features, since exercise of the call becomes less likely as
interest rates rise, which in turn will make the securities more sensitive to
changes in interest rates and result in even steeper price declines in the event
of further interest rate increases. An increase in interest rates could also
cause principal payments on a debt security to be repaid at a slower rate than
expected. This risk is particularly prevalent for a callable debt security where
an increase in interest rates could cause the issuer of that security to not
redeem the security as anticipated on the call date, effectively lengthening the
security’s expected maturity, in turn
19
making
that security more vulnerable to interest rate risk and reducing its market
value. When interest rates fall, the Fund may be required to
reinvest the proceeds from the sale, redemption or early prepayment of a debt
security at a lower interest rate.
LIBOR
TRANSITION
RISK. The United
Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, intends to
cease making LIBOR available as a reference rate over a phase-out period that
began on January 1, 2022. However, subsequent announcements by the
FCA, the LIBOR administrators, and other
regulators indicate that it is possible that the most widely used LIBOR rates
may continue until mid-2023. The unavailability or replacement of LIBOR may
affect the value, liquidity or return on certain Fund investments and may result
in costs incurred in connection with closing out positions and entering into new
trades. Any potential effects of the transition away from LIBOR on the Fund or
on certain instruments in which the Fund invests can be difficult to ascertain,
and they may vary depending on a variety of factors. In the United States, it is
anticipated that in many instances SOFR, will replace LIBOR as the reference
rate for many of the floating rate instruments held by the Fund. There is no assurance that the
composition or characteristics of SOFR, or any alternative reference
rate, will be similar to or produce the
same value or economic equivalence as LIBOR or that instruments using an
alternative rate will have the same volume or liquidity. As a
result, the transition process might lead to increased volatility
and reduced liquidity in markets that currently rely on LIBOR to determine
interest rates; a reduction in the value of some LIBOR-based
investments; increased difficulty in borrowing or refinancing and
diminished effectiveness of any applicable hedging strategies
against instruments whose terms currently
include LIBOR; and/or costs incurred in connection with temporary borrowings and
closing out positions and entering into new agreements. Any such effects (as
well as other unforeseen effects) of the transition away from LIBOR and
the adoption of alternative reference rates could result in losses to the
Fund.
LIQUIDITY
RISK.
The Fund may have investments that it may not be able to dispose of or close out
readily at a favorable time or price (or at all), or at a price approximating
the Fund’s valuation of the investment. For example, certain investments may be
subject to restrictions on resale, may trade over-the-counter or in limited
volume, or may not have an active trading market. Illiquid securities may trade
at a discount from comparable, more liquid investments and may be subject to
wide fluctuations in market value. It may be difficult for the Fund to value
illiquid securities accurately. The market for certain investments may become
illiquid under adverse market or economic conditions independent of any specific
adverse changes in the conditions of a particular issuer. If the Fund needed to
sell a large block of illiquid securities to meet shareholder redemption request
or to raise cash, these sales could further reduce the securities’ prices and
adversely affect performance of the Fund. Disposal of illiquid securities may
entail registration expenses and other transaction costs that are higher than
those for liquid securities.
MANAGEMENT
RISK.
The Fund is subject to management risk because it is an actively managed
portfolio. In managing the Fund’s investment portfolio, the portfolio managers
will apply investment techniques and risk analyses that may not produce the
desired result. There can be no guarantee that the Fund will meet its investment
objective(s), meet relevant benchmarks or perform as well as other funds with
similar objectives.
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 ensuing policies enacted by governments and central banks have caused and may continue to cause
significant volatility and uncertainty in global financial markets, negatively
impacting global growth prospects. While the
U.S. has resumed “reasonably” normal
business activity, many countries continue to impose lockdown measures.
Additionally, there is no guarantee that vaccines will be effective against
emerging variants of the disease. Additionally, in February 2022, Russia invaded Ukraine
which has caused and could continue to
cause significant market
20
disruptions and
volatility within the markets in Russia, Europe, and the United
States. The hostilities and sanctions resulting from those
hostilities could have a significant impact on certain Fund investments as well
as Fund performance. 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 and the bid/ask
spread on the Fund’s shares may widen.
NON-DIVERSIFICATION
RISK. 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.
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.
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 and the bid/ask spread on the Fund’s shares may widen.
PREPAYMENT
RISK.
Prepayment risk is the risk that the issuer of a debt security will repay
principal (in part or in whole) prior to the scheduled maturity date. Debt
securities allowing prepayment may offer less potential for gains during a
period of declining interest rates, as the Fund may be required to reinvest the
proceeds of any prepayment at lower interest rates, reducing its income. If the
Fund purchased the debt securities at a premium, prepayments on the securities
could cause the Fund to lose a portion of its principal investment. These
factors may cause the value of an investment in the Fund to change. The impact
of prepayments on the price of a debt security may be difficult to predict and
may increase the security’s volatility.
SENIOR
LOAN RISK. Senior loans
represent debt obligations of corporate borrowers, that are typically senior to
other obligations of the borrower and generally secured by the assets of the
borrower. Senior loans may be investment grade or below investment grade. The
senior loan market has seen a significant increase in loans with limited
financial maintenance covenants or, in some cases, no financial maintenance
covenants (i.e., “covenant-lite
loans”) that would typically be included in a traditional loan credit agreement
and general weakening of other restrictive covenants applicable to the borrower
such as limitations on incurrence of additional debt, restrictions on payments
of junior debt or restrictions on dividends and distributions, all of which may
impact recovery values and/or trading levels of senior loans in the future. The
absence of financial maintenance covenants in a loan agreement generally means
that the lender may be unable to declare a default if financial performance
deteriorates. This may hinder the Fund’s ability to reprice credit risk
associated with the borrower and reduce
21
the
Fund’s ability to restructure a problematic loan and mitigate potential loss. As
a result, the Fund’s exposure to losses on investments in senior
loans may be increased, especially during a downturn in the credit cycle or
changes in market or economic conditions.
Senior
loans are also subject to the same risks as investments in other types of debt
securities, including credit risk, interest rate risk, liquidity
risk and valuation risk that may be heightened because of the limited public
information available regarding senior loans and because loan borrowers may be
more highly leveraged and tend to be more adversely affected by changes in
market or economic conditions. If the Fund holds a senior loan through another
financial institution or relies on a financial institution to administer the
loan, its receipt of principal and interest on the loan may be subject to the
credit risk of that financial institution. The Fund may invest in secured and
unsecured participations in loans and assignments of such loans. In making
investments in such loans, which are made by banks or other financial
intermediaries to borrowers, the Fund will depend primarily upon the
creditworthiness of the borrower for payment of principal and interest which
will expose the Fund to the credit risk of the underlying borrower.
Participations by the Fund in a lender's portion of a bank loan typically will
result in the Fund having a contractual relationship only with such lender, not
with the borrower. The Fund may have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender selling a
loan participation and only upon receipt by such lender of such payments from
the borrower, which exposes the Fund to the credit risk of the lender. In
connection with purchasing participations, the Fund generally will have no right
to enforce compliance by the borrower with the terms of the loan agreement, nor
any rights with respect to any funds acquired by other lenders through set-off
against the borrower, and the Fund may not directly benefit from any collateral
supporting the loan in which it has purchased the participation.
Although
senior loans are generally secured by specific collateral, there can be no
assurance that liquidation of such collateral would satisfy the
borrower’s obligation in the event of non-payment of scheduled interest or
principal or that such collateral could be readily liquidated. To the extent
that a senior loan is collateralized by equity interests in the borrower or its
subsidiaries, such equity interest may lose all of its value in the event of the
bankruptcy of the borrower. Uncollateralized senior loans involve a greater risk
of loss. Senior loans made in connection with highly leveraged transactions are
subject to greater risks than other senior loans. For example, the risks of
default or bankruptcy of the borrower or the risks that other creditors of the
borrower may seek to nullify or subordinate the Fund’s claims on any collateral
securing the loan are greater in highly leveraged transactions.
Additionally,
there is no central clearinghouse for loan trades and the loan market has not
established enforceable settlement standards or remedies
for failure to settle. As such, the secondary market for senior loans may be
subject to irregular trading activity, wide bid/ask spreads and extended trade
settlement periods, which may cause the Fund to be unable to realize the full
value of its investment. Lastly, senior loans may not be considered
“securities,” and the Fund may not be entitled to rely on the anti-fraud
protections of the federal securities laws and could be forced to rely on the
contractual provisions in the loan agreement and state law to enforce its right
to repayment.
SIGNIFICANT
EXPOSURE RISK. 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 development that affected a
particular asset class, region or industry 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 volatility and market risk than a fund that is more
broadly diversified.
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.
VALUATION
RISK. The sale price the Fund could receive
for a security may differ from the Fund’s valuation of the security,
particularly for securities that trade in low volume or volatile markets or that
are valued using a fair value methodology. Unlike publicly traded securities
that trade on national securities exchanges, there is no central place or
exchange for trading most debt securities. Debt securities generally trade on an
“over-the-counter” market. Due to the lack of centralized information and
trading, and variations in lot sizes of certain debt securities, the valuation
of debt securities may carry more uncertainty and risk than that of publicly
traded securities. Debt securities are commonly valued by third-party pricing
services that utilize a range of market-based inputs and assumptions, including
readily available market quotations obtained from broker-dealers making markets
in such securities, cash flows and transactions for comparable instruments.
However, because the available
22
information is less
reliable and more subjective, elements of judgment may play a greater role in
valuation of debt securities than for other types of securities.
Different pricing services may incorporate different assumptions and inputs into
their valuation methodologies, potentially resulting in different values for the
same securities. As a result, if the Advisor were to change its valuation
policies, or if the Fund were to change pricing services, or if a pricing
service were to change its valuation methodology, there could be a material
impact, either positive or negative, on the Fund’s net asset value.
Additionally, pricing services generally price debt securities assuming orderly
transactions of an institutional “round lot” size, but some trades may occur in
smaller, “odd lot” sizes, often at lower
prices than institutional round lot trades. There is no assurance that the Fund
will be able to sell a portfolio security at the price established by the
pricing service, which could result in a loss to the Fund. In addition, the value of the debt
securities in the Fund’s portfolio may change on days or during time periods
when shareholders will not be able to purchase or sell the Fund’s shares.
Authorized Participants who purchase or redeem Fund shares on days when the Fund
is holding fair-valued securities may receive fewer or more shares, or lower or
higher redemption proceeds, than they would have received had the Fund not
fair-valued securities or used a different valuation methodology. Net asset
value calculation may also be impacted by operational risks arising from factors
such as failures in systems and technology.
VOLATILITY
RISK.
Volatility is the characteristic of a security, an index or a market to
fluctuate significantly in price within a short time period. The Fund may invest
in securities or financial instruments that exhibit more volatility than the
market as a whole. Such exposures could cause the Fund’s net asset value to
experience significant increases or declines in value over short periods of
time. Volatility can be caused by many factors, including changes in the economy
or financial markets or for reasons specific to a particular
issuer.
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.
CLO
RISK.
CLOs bear many of the same risks as other forms of asset-backed securities,
including credit risk, interest rate risk, liquidity risk and valuation risk. As
they are backed by pools of loans, CLOs also bear similar risks to investing in
loans directly. CLOs issue classes or “tranches” that vary in risk, expected
maturity, priority or payment and yield. CLOs may experience substantial losses
attributable to loan defaults. Losses caused by defaults on underlying loans are
typically borne first by the holders of subordinate tranches. Investment in CLOs
may decrease in market value when the CLO experiences loan defaults or credit
impairment, the disappearance of one or more subordinate tranches, or market
anticipation of defaults and investor aversion to CLO securities as a class. The
complex structure of a CLO may not be fully understood at the time of investment
and produce disputes with the issuer or unexpected investment
results.
COUNTERPARTY
RISK.
The Fund is subject to counterparty risk. If the Fund enters into an investment
or transaction that depends on the performance of another party, the Fund
becomes subject to the credit risk of that counterparty. The Fund's ability to
profit from these types of investments and transactions depends on the
willingness and ability of the Fund’s counterparty to perform its obligations.
If a counterparty fails to meet its contractual obligations, the Fund may be
unable to terminate or realize any gain on the investment or transaction,
resulting in a loss to the Fund. The Fund may experience significant delays in
obtaining any recovery in an insolvency, bankruptcy, or other reorganization
proceeding involving a counterparty (including recovery of any collateral posted
by it) and may obtain only a limited recovery or may obtain no recovery in such
circumstances. If the Fund holds collateral posted by its counterparty, it may
be delayed or prevented from realizing on the collateral in the event of a
bankruptcy or insolvency proceeding relating to the counterparty. Under
applicable law or contractual provisions, including if the Fund enters into an
investment or transaction with a financial institution and such financial
institution (or an affiliate of the financial institution) experiences financial
difficulties, then the Fund may in certain situations be prevented or delayed
from exercising its rights to terminate the investment or transaction, or to
realize on any collateral and may result in the suspension of payment and
delivery obligations of the parties under such investment or transactions or in
another institution being substituted for that financial institution without the
consent of the Fund. Further, the Fund may be subject to “bail-in” risk under
applicable law whereby, if required by the financial institution's authority,
the financial institution's liabilities could be written down, eliminated or
converted into equity or an alternative instrument of ownership. A bail-in of a
financial institution may result in a reduction in value of some or all of
securities and, if the Fund holds such securities or has entered into a
transaction with such a financial security when a bail-in occurs, the Fund may
also be similarly impacted.
23
DEPENDENCE
ON KEY PERSONNEL RISK. The Advisor is
dependent upon the experience and expertise of the Fund’s portfolio managers in
providing advisory services with respect to the Fund’s investments. If the
Advisor were to lose the services of any of these portfolio managers, its
ability to service the Fund could be adversely affected. There can be no
assurance that a suitable replacement could be found for any of the portfolio
managers in the event of their death, resignation, retirement or inability to
act on behalf of the Advisor.
DERIVATIVES
RISK.
The use of derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities and
other traditional investments. These risks include: (i) the risk that the
counterparty to a derivative transaction may not fulfill its contractual
obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk
that changes in the value of the derivative may not correlate perfectly with the
underlying asset. Derivative prices are highly volatile and may fluctuate
substantially during a short period of time. Such prices are influenced by
numerous factors that affect the markets, including, but not limited to:
changing supply and demand relationships; government programs and policies;
national and international political and economic events, changes in interest
rates, inflation and deflation and changes in supply and demand relationships.
Trading derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities.
Derivative contracts ordinarily have leverage inherent in their terms. The low
margin deposits normally required in trading derivatives, including futures
contracts, permit a high degree of leverage. Accordingly, a relatively small
price movement may result in an immediate and substantial loss. The use of
leverage may also cause a Fund to liquidate portfolio positions when it would
not be advantageous to do so in order to satisfy its obligations or to meet
collateral segregation requirements. The use of leveraged derivatives can
magnify potential for gain or loss and, therefore, amplify the effects of market
volatility on share price.
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).
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. If the Fund
fails to qualify as a regulated investment company, distributions to the Fund's
shareholders generally would be eligible (i) for treatment as qualified dividend
income in the case of individual shareholders and (ii) for the dividends
received deduction in the case of corporate shareholders. See "Federal Tax
Matters."
FIXED-TO-FLOATING
RATE SECURITIES RISK.
Fixed-to-floating rate securities are securities that have an initial term with
a fixed dividend rate and following this initial term bear a floating dividend
rate. Securities which include a floating or variable interest rate component
can be less sensitive to interest rate changes than securities with fixed
interest rates, but may decline in value if their interest rates do not rise as
much, or as quickly, as interest rates in general. Although floating rate
preferred securities can be less sensitive to interest rate risk than fixed-rate
preferred securities, they are subject to the risks applicable to preferred
securities more generally.
FUTURES
CONTRACTS RISK. The Fund
may invest in futures contracts. Futures contracts are typically exchange-traded
contracts that call for the future delivery of an asset by one party to another
at a certain price and date, or cash settlement of the terms of the contract.
The risk of a position in a futures contract may be very large compared to the
relatively low level of margin the Fund is required to deposit. In many cases, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required
margin deposit. The ability to establish and close out positions in futures
contracts is subject to the development and maintenance of a liquid secondary
market.
24
There
is no assurance that a liquid secondary market on an exchange will exist for any
particular futures contract at any particular time. If the Fund
uses futures contracts for hedging purposes, there is a risk of imperfect
correlation between movements in the prices of the derivatives and movements in
the securities or index underlying the derivatives or movements in the prices of
the Fund's investments that are the subject of such hedge. The prices of futures
contracts, for a number of reasons, may not correlate perfectly with movements
in the securities or index underlying them. For example, participants in the
futures markets are subject to margin deposit requirements less onerous than
margin requirements in the securities markets in general. As a result, futures
markets may attract more speculators than the securities markets. Increased
participation by speculators in those markets may cause temporary price
distortions. Due to the possibility of price distortion, even a correct forecast
of general market trends by the Fund’s portfolio managers still may not result
in a successful derivatives activity over a very short time period. The
Commodity Futures Trading Commission and the various exchanges have established
limits referred to as “speculative position limits” on the maximum net long or
net short positions that any person and certain affiliated entities may hold or
control in a particular futures contract. It is possible that, as a result of
such limits, the Fund will be precluded from taking positions in certain futures
contracts it might have otherwise taken to the disadvantage of
shareholders.
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
represented owned by the Fund. 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 Sub-Advisor determines to sell such a holding.
LEVERAGE
RISK.
Leverage may result in losses that exceed the amount originally invested and may
accelerate the rates of losses. Leverage tends to magnify, sometimes
significantly, the effect of any increase or decrease in a Fund’s exposure to an
asset or class of assets and may cause the value of a Fund’s portfolio and a
Fund’s shares to be volatile and sensitive to market swings. Certain instruments
have the potential for unlimited loss, regardless of the size of the initial
investment.
MUNICIPAL
SECURITIES RISK. The values of
municipal securities may be adversely affected by local political and economic
conditions and developments. Adverse conditions in an industry significant to a
local economy could have a correspondingly adverse effect on the financial
condition of local issuers. Other factors that could affect municipal securities
include a change in the local, state, or national economy, demographic factors,
ecological or environmental concerns, statutory limitations on the issuer’s
ability to increase taxes, and other developments generally affecting the
revenue of issuers (for example, legislation or court decisions reducing state
aid to local governments or mandating additional services). This risk would be
heightened to the extent that a Fund invests a substantial portion of its assets
in bonds issued pursuant to similar projects (such as those relating to the
education, health care, housing, transportation, or utilities industries), in
industrial development bonds, or in particular types of municipal securities
(such as general obligation bonds, private activity bonds or moral obligation
bonds) that are particularly exposed to specific types of adverse economic,
business or political events. Changes in a municipality’s financial health may
also make it difficult for the municipality to make interest and principal
payments when due. The values of municipal securities that depend on a specific
revenue source to fund their payment obligations may fluctuate as a result of
actual or anticipated changes in the cash flows generated by the revenue source
or changes in the priority of the municipal securities to receive the cash flows
generated by the revenue source. Under some circumstances, municipal securities
might not pay interest unless the state legislature or municipality authorizes
money for that purpose. Municipal securities may be more susceptible to
downgrades or defaults during recessions or similar periods of economic stress.
In addition, since some municipal obligations may be secured or guaranteed by
banks and other institutions, the risk to a Fund could increase if the banking
or financial sector suffers an economic downturn and/or if the credit ratings of
the institutions issuing the guarantee are downgraded or at risk of being
downgraded by a national rating organization. Such a downward revision or risk
of being downgraded may have an adverse effect on the market prices of the bonds
and thus the value of the Fund’s investments. In addition to being downgraded,
an insolvent municipality may file for bankruptcy. The reorganization of a
municipality’s debts may significantly affect the rights of creditors and the
value of the securities issued by the municipality and the value of a Fund’s
investments. In addition, income from municipal securities held by a Fund could
be declared taxable because of, among other things, unfavorable changes in tax
laws, adverse interpretations by the Internal Revenue Service or state tax
authorities, or noncompliant conduct of an issuer or other obligated party. Loss
of tax-exempt status may cause interest received and distributed to shareholders
by a Fund to be taxable and may result in a significant decline in the values of
such municipal securities. Due to the COVID-19 pandemic, the risks of the
municipal securities market have been magnified. The costs associated with
combating the pandemic and the negative impact on tax revenues has adversely
affected the financial condition of many states and political subdivisions.
These risks may also adversely affect several sectors of the municipal bond
market,
25
such
as airports, toll roads, hospitals and colleges, among many others. The full
impact of the COVID-19 pandemic on state and political
subdivisions’ ability to make payments on debt obligations is impossible to
predict, but could negatively impact the value of bonds, the ability of state
and political subdivisions to make payments when due and the performance of the
Fund.
NON-U.S.
SECURITIES RISK. The
Fund may invest 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 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.
OPTIONS
RISK.
The use of options involves investment strategies and risks different from those
associated with ordinary portfolio securities transactions and depends on the
ability of the Fund's portfolio manager to forecast market movements correctly.
The prices of options are influenced by, among other things, actual and
anticipated changes in the value of the underlying instrument, or in interest or
currency exchange rates, including the anticipated volatility, which in turn are
affected by fiscal and monetary policies and by national and international
political and economic events. As a seller (writer) of a put option, the seller
will tend to lose money if the value of the reference index or security falls
below the strike price. As the seller (writer) of a call option, the seller will
tend to lose money if the value of the reference index or security rises above
the strike price. As the buyer of a put or call option, the buyer risks losing
the entire premium invested in the option if the buyer does not exercise the
option. The effective use of options also depends on the Fund's ability to
terminate option positions at times deemed desirable to do so. There is no
assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price. In addition, there may at times be an
imperfect correlation between the movement in values of options and their
underlying securities and there may at times not be a liquid secondary market
for certain options. Options may also involve the use of leverage, which could
result in greater price volatility than other markets.
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.
U.S.
GOVERNMENT SECURITIES RISK. The Fund may invest
in U.S. government securities. U.S. government securities are subject to
interest rate risk but generally do not involve the credit risks associated with
investments in other types of debt securities. As a result, the yields available
from U.S. government securities are generally lower than the yields available
from other debt securities. U.S. government securities are guaranteed only as to
the timely payment of interest and the payment of principal when held to
maturity. While securities issued or guaranteed by U.S. federal government
agencies (such as Ginnie Mae) are backed by the full faith and credit of the
U.S. Department of the Treasury, securities issued by government sponsored
entities (such as Fannie Mae and Freddie Mac) are solely the obligation of the
issuer and generally do not carry any guarantee from the U.S. government. No
assurance can be given that the U.S. government will provide financial support
to its government sponsored entities or any other agency if not obligated by law
to do so.
26
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
objectives 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, distributor, 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 investment of the Fund’s assets, managing the Fund’s
business affairs and providing certain clerical, bookkeeping and other
administrative services.
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 Fund.
First Trust serves
as advisor or sub-advisor for 9 mutual fund portfolios, 10
exchange-traded funds consisting of 201 series and 14 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.
Bill Housey, Todd
Larson, Eric R. Maisel, Jeffrey Scott, Nathan Simons and Scott Skowronski
are the Fund’s portfolio managers and share responsibilities for the day-to-day
management of the Fund’s investment portfolio.
•
William Housey, CFA, Managing
Director of Fixed Income, Senior Portfolio Manager. Mr. Housey joined First
Trust Advisors L.P. in June 2010 as the Senior Portfolio Manager for the
Leveraged Finance Team and has 26 years of investment experience. Mr.
Housey is a Managing Director of Fixed Income and is also a member of the First
Trust Strategic Model Investment Committee and the Fixed Income Sub-Committee.
Prior to joining First Trust, Mr. Housey was at Morgan Stanley Investment
Management and its wholly owned subsidiary, Van Kampen Funds, Inc. for 11 years
where he last served as Executive Director and Co-Portfolio Manager. Mr. Housey
has extensive experience in the portfolio management of both leveraged and
unleveraged credit products, including senior loans, high-yield bonds, credit
derivatives and corporate restructurings. Mr. Housey received a B.S. in Finance
from Eastern Illinois University and an M.B.A. in Finance as well as Management
and Strategy from Northwestern University’s Kellogg School of Business. He also
holds the FINRA Series 7, Series 52 and Series 63 licenses. Mr. Housey also
holds the Chartered Financial Analyst designation. He is a member of the CFA
Institute and the CFA Society of Chicago. Mr. Housey also serves on the Village
of Glen Ellyn, IL Police Pension Board.
•
Todd Larson, CFA, joined First Trust
in 2007 as Portfolio Manager for the Investment Grade Fixed Income Team and has
32 years of investment experience. Prior to joining First Trust, Mr. Larson was
Vice President and Portfolio Manager for ABN AMRO Asset Management. Mr. Larson
also served on ABN AMRO’s Macro- economic Committee and Global Credit Committee.
His previous positions also include Portfolio Manager at Van Kampen American
Capital and Portfolio Manager at Horizon Cash Management. Mr. Larson has
extensive experience in the portfolio management of core-style investment grade
mandates and enhanced cash strategies. Mr. Larson received a B.A. in Business
Administration from North Park College. He holds the Chartered Financial Analyst
designation and is a member of the CFA Institute and the CFA Society of
Chicago.
•
Eric R. Maisel, CFA, is a Portfolio
Manager and Senior Vice President of First Trust and has 30 years of investment
experience. Mr. Maisel joined First Trust in 2008. His previous positions
include Senior Portfolio Manager for the Ascendant Structured Credit Opportunity
Fund, Managing Director and Senior Portfolio Manager for the Black River Global
Credit Fund, Vice President and Senior Trader for the Cargill Financial Markets
Group, and Senior Corporate Bond Trader for American General Corporation. Mr.
Maisel earned his B.A. from the University of Pittsburgh, and his M.Sc. from the
University of Oxford. He is a member of the CFA Institute and the CFA Society of
Chicago.
•
Jeffrey Scott, CFA, Senior Vice
President, Portfolio Manager. Mr. Scott is a Portfolio Manager for the Leveraged
Finance Team at First Trust Advisors L.P. He has 33 years of experience in the
investment management industry
27
and
has extensive experience in credit analysis, product development, and product
management. Prior to joining First Trust, Mr.
Scott served as an Assistant Portfolio Manager and as a Senior Credit Analyst
for Morgan Stanley/Van Kampen from October 2008 to June 2010. As Assistant
Portfolio Manager, Mr. Scott served on a team that managed over $4.0 billion of
Senior Loan assets in three separate funds: Van Kampen Senior Loan Fund; Van
Kampen Senior Income Trust; and Van Kampen Dynamic Credit Opportunities Fund.
His responsibilities included assisting with portfolio construction, buy and
sell decision making, and monitoring fund liquidity and leverage. Mr. Scott
earned a B.S. in Finance and Economics from Elmhurst College and an M.B.A. with
specialization in Analytical Finance and Econometrics and Statistics from the
University of Chicago. He also holds the Chartered Financial Analyst designation
and is a member of the CFA Institute and the CFA Society of
Chicago.
•
Nathan Simons, CFA, joined First
Trust Advisors in 2020 as a Credit Analyst for the Investment Grade Fixed Income
Team. He has 12 years of investment experience. Prior to joining First Trust,
Mr. Simons was an Assistant Portfolio Manager at Great West Financial covering
both investment grade and high yield issuers for stable value and other short
duration strategies. His prior positions include Research Analyst in both public
and private debt at Navy Mutual Aid Association. Mr. Simons received his B.S. in
Mathematics and Economics from Hillsdale College. He holds the Chartered
Financial Analyst designation.
•
Scott Skowronski, CFA, joined First
Trust Advisors L.P. in November 2022 as Portfolio Manager for the Investment
Grade Team and has 26 years of investment experience. Prior to joining First
Trust, Mr. Skowronski was a Senior Portfolio Manager and Principal at Asset
Allocation & Management, LLC (AAM) for over 10 years. In that role, he was
responsible for leading the Portfolio Strategies Committee to determine sector
and portfolio positioning for all investment grade bond portfolios across the
firm and was also a member of the Asset Allocation Committee. Prior to that, Mr.
Skowronski was an Associate Portfolio Manager at Brandes Investment Partners and
was also a Fixed Income Portfolio Manager at COUNTRY Financial. He has extensive
experience in portfolio management across all investment grade bond sectors
including credit, securitized, and municipal bonds. Mr. Skowronski received a
B.A. in Risk Management from Illinois Wesleyan University. He also holds the
Chartered Financial Analyst designation and is a member of the CFA Society of
Chicago.
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 portfolio managers’ compensation, other accounts managed
by the portfolio managers and the portfolio managers’ ownership of shares in 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 equal to 0.55% 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, acquired
fund fees and expenses, if any, brokerage commissions and other expenses
connected with the execution of portfolio transactions, distribution and service
fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses.
Pursuant to a
contractual agreement, First Trust has agreed to waive management fees of 0.10%
of average daily net assets through November 12, 2023. The waiver
agreement may be terminated by action of the Board at any time upon 60 days’
written notice by the Trust, on behalf of the Fund, or by First Trust only after
November 12, 2023.
As approved by the Trust’s Board of Trustees, the management fee paid to First Trust will be reduced at certain levels of Fund net assets (“breakpoints”). See the Fund's Statement of Additional Information for more information on the breakpoints.
As approved by the Trust’s Board of Trustees, the management fee paid to First Trust will be reduced at certain levels of Fund net assets (“breakpoints”). See the Fund's Statement of Additional Information for more information on the breakpoints.
A discussion
regarding the Board’s approval of the Investment Management Agreement
is available in the
Fund’s Semi-Annual Report to Shareholders for the period ended April 30,
2022.
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,
28
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.
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) and
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 objectives. 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.
29
Dividends,
Distributions and Taxes
Dividends
from net investment income, if any, are declared and paid monthly 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.
This federal income
tax summary is based in part on the advice of counsel to the Fund. The Internal
Revenue Service ("IRS") could disagree with any conclusions
set forth in this section. 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” (a “RIC”) under the federal tax laws. If the
Fund qualifies as a RIC 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, 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
RICs.
30
Capital
Gains and Losses
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 income 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 share 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.
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.
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 brokerage fees, if any. 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 IRS, 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. For tax years
after December 31, 2022, amounts paid to or recognized by a non-U.S.
31
affiliate that are
excluded from tax under the portfolio interest, capital gain dividends,
short-term capital gains or tax-exempt interest dividend exceptions or
applicable treaties, may be taken into consideration in determining whether a
corporation is an “applicable corporation” subject to a 15% minimum tax on
adjusted financial statement income.
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. 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.
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 March 31, 2024.
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
is open for business. Net asset value 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, 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 in accordance with valuation procedures
approved by the Board,
and in accordance with provisions of the 1940 Act and the rules thereunder. Rule
2a-5 under the 1940 Act requires the fair valuation of all portfolio investments
for which market quotations are not readily available. Pursuant to Rule 2a-5
under the 1940 Act, the Board has appointed the Advisor as its valuation
designee for all portfolio investments. Certain securities in which the Fund may
invest are not listed on any securities exchange or board of trade. Such
securities are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many respects like
an over the counter secondary market, although typically no formal market makers
exist. Certain securities, particularly debt securities, have few or no trades,
or trade infrequently, and information regarding a specific security may not be
widely available or may be incomplete. Accordingly, determinations of the fair
value of debt securities may be based on infrequent and dated information.
Because there is less reliable, objective data available, elements of judgment
may play a greater role in valuation of debt securities than for other types of
securities. Typically, debt securities are valued using information provided by
a third-party pricing service. The third-party pricing service primarily uses
broker quotes to value the securities.
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 approved by the Board and in accordance
with the 1940 Act and the rules thereunder. 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 the AIM are valued at the official closing price on the
business day as of which such value is being determined. 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 primary
exchange for such securities. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on Nasdaq or the AIM,
are valued at the mean of the most recent bid and asked price, if available, and
otherwise
32
at the last trade 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 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 Advisor at fair value. The use of fair value
pricing by the Fund is governed by valuation procedures approved by the Board
and in accordance with the provisions of the 1940 Act and the rules thereunder.
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) 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, in the opinion of the Advisor,
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 portfolio investment upon the measurement
date under current market conditions. When fair value prices are used, generally
they will differ from the current market valuations. 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 shares of the
Fund, the value of the Fund's securities may change on days when investors are
not able to purchase or sell 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.
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.
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.
33
Total
Return Information
The table below
compares the total return of the Fund to a market index. The information
presented for the Fund is for 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. 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.
First
Trust Limited Duration Investment Grade Corporate ETF (FSIG)
Total Returns as of October 31, 2022
Total Returns as of October 31, 2022
|
|
Cumulative |
|
|
Inception
(11/17/2021) |
|
Fund
Performance |
|
|
Net Asset
Value |
-6.28% |
|
Market
Price |
-6.13% |
|
Index
Performance |
|
|
Bloomberg
US Corporate Bond 1-5 Year Index |
-7.72% |
34
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the period shown. Certain information reflects financial
results for a single share of the Fund. The total return represents 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 period 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 Fund's Annual Report to Shareholders dated
October 31, 2022 and is incorporated by reference in the Fund's SAI, which is
available upon request.
First Trust
Exchange-Traded Fund IV
Financial
Highlights
For a share outstanding throughout the period
For a share outstanding throughout the period
First Trust
Limited Duration Investment Grade Corporate ETF (FSIG)
|
|
Period
Ended
10/31/2022(a)
|
|
| |
|
Net
asset value, beginning of period |
$20.00 |
|
Income
from investment operations: |
|
|
Net
investment income (loss) |
0.39 |
|
Net
realized and unrealized gain (loss) |
(1.64) |
|
Total
from investment operations |
(1.25) |
|
Distributions
paid to shareholders from: |
|
|
Net
investment income |
(0.37) |
|
Net
asset value, end of period |
$18.38 |
|
Total
Return (b) |
(6.28)% |
|
Ratios/supplemental
data: |
|
|
Net
assets, end of period (in 000’s) |
$16,542 |
|
Ratios
to average net assets: |
|
|
Ratio of
total expenses to average net assets |
0.55%(c) |
|
Ratio of
net expenses to average net assets |
0.45%(c) |
|
Ratio of
net investment income (loss) to average net assets |
2.33%(c) |
|
Portfolio
turnover rate (d) |
113% |
(a)
Inception date
is November 17, 2021, 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 return
presented does not reflect the deduction of taxes that a shareholder would pay
on Fund distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods of
less than a year. The total return would have been lower if certain fees had not
been waived by the investment advisor.
(c)
Annualized.
(d)
Portfolio
turnover is calculated for the time period presented and is not annualized for
periods of less than a year and does not include securities received or
delivered from processing creations or redemptions and in-kind
transactions.
35
Other
Information
Continuous
Offering
The
Fund will issue, on a continuous offering basis, its shares in one or more
groups of a fixed number of Fund shares (each such group of such
specified number of individual Fund shares, a “Creation
Unit Aggregation”). The method by
which Creation Unit Aggregations of Fund shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of shares are issued and sold by 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.
36
|
First
Trust
Exchange-Traded
Fund IV |
First
Trust Limited Duration Investment Grade Corporate 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 #: 333-174332
811-22559
811-22559