|
First
Trust
Exchange-Traded
Fund IV |
Prospectus
FT Vest Rising Dividend Achievers
Target Income ETF
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Ticker
Symbol: |
RDVI |
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Exchange: |
Cboe
BZX Exchange, Inc. |
FT Vest Rising Dividend Achievers Target
Income ETF (the “Fund”) lists and principally trades its
shares on Cboe BZX Exchange, Inc. (“Cboe
BZX,” 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, 2024
Summary
Information
(fees paid directly from your investment)
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Maximum
Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price) |
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(expenses that you pay each year as a percentage of the value of your investment)
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Management
Fees |
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Distribution
and Service (12b-1) Fees |
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Other
Expenses |
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Total Annual
Fund Operating Expenses |
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
$ |
3
4
5
6
7
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 |
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Return After
Taxes on Distributions and Sale of Shares |
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Nasdaq US
Rising Dividend AchieversTM Index
(reflects no deduction for
fees,
expenses or taxes) |
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S&P
500® Index
(reflects no deduction for fees, expenses or taxes) |
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Management
Investment
Advisor
First Trust Advisors
L.P. (“First
Trust”
or the “Advisor”)
Investment
Sub-Advisor
Vest Financial LLC (“Vest” or the “Sub-Advisor”)
10
Portfolio
Managers
The following persons
serve as portfolio managers to the Fund:
•
Karan Sood, Managing Director of
Vest
•
Howard Rubin, Managing Director of
Vest
The
portfolio managers are primarily and jointly responsible for the day-to-day
management of the Fund. Each portfolio manager has served as
a part of the portfolio management team of the Fund since October
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 1940
Act. The Fund is actively managed and does not seek to track the performance of
an index. The Fund’s investment objective to provide current income with a
secondary objective of providing capital appreciation is non-fundamental and may
be changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval.
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 without shareholder approval. The fundamental policies of
the Fund are set forth in the SAI under "Investment Objective and Policies." 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
objective.
The
Fund has adopted an investment policy pursuant to Rule 35d-1 under the 1940 Act
(the "Name
Policy"), whereby the Fund,
under normal market conditions, the Fund will invest at least 80% of its net
assets (plus any borrowings for investment purposes) in dividend-paying
securities and/or investments that provide exposure to dividend-paying
securities. The Name Policy may be changed by the Board without shareholder
approval upon 60 days’ prior written notice to shareholders. The market value of
the derivatives will be used for purposes of compliance with the Name
Policy.
The Fund will not
invest 25% or more of the value of its total assets in securities of issuers in
any one industry or group of industries. This restriction does not
apply to obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities, or securities of other investment companies.
While
it is not expected that the Fund will invest in the securities of other
investment companies, any such investments would be subject to
limitations imposed by the 1940 Act and the related rules and interpretations.
The Fund has adopted a policy that it will not invest in other investment
companies in excess of 1940 Act limits in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
The
Fund seeks to provide investors with current income with a secondary objective
of providing capital appreciation. The equity securities in
which the Fund will invest and the options which the Fund will write will be
limited to U.S. exchange-traded securities and options. The equity securities
held by the Fund will be selected by the portfolio managers from the common
stocks and depositary receipts within the Index. The portfolio managers decide
which equity securities to buy and sell and individual security weighting of the
equity portfolio in order to seek to achieve the investment objective and
strategy described above.
While
the Fund seeks to make distributions that are above the current annual dividend
yield of the S&P 500® Index, there is
no guarantee that the Fund's distribution target will be achieved. The Fund does
not seek to achieve any specific level of total return performance compared with
the total return performance of the S&P 500® Index or the
Index. Capital appreciation on the securities held by the Fund may be less than
the capital appreciation of the S&P 500® Index (or an
Underlying ETF) and the Index, and the total return performance of the Fund may
be less than the total return performance of the S&P 500® Index (or an
Underlying ETF) and the Index.
The Index includes
50 U.S. exchange-traded equity securities, including securities issued by
non-U.S. companies that trade on U.S. securities exchanges in the
form of depositary receipts. In order to be eligible for inclusion in the Index,
a security must have paid a dividend in the trailing 12-month period greater
than the dividend paid in the trailing 12-month period three and five years
prior. A security must also be issued by companies that meet the following three
balance sheet characteristics: (i) have positive earnings-per-share in the
trailing twelve-month period greater than earnings-per-share in the trailing
twelve-month period three years prior; (ii) have a cash-to-debt ratio greater
than 50%; and (iii) have a trailing 12-month payout ratio less than or equal to
65%. To be eligible for inclusion in the Index, a security must also meet the
following criteria: (i) be a member of the Nasdaq US Benchmark Index; (ii) not
be classified as a "Mortgage Real Estate Investment Trust" or a “Real Estate
Investment Trust" by the Industry Classification Benchmark; (iii) rank in the
top 1,000 of the Nasdaq US Benchmark Index by market capitalization after
removing ineligible security types; and (iv) have a minimum three-month average
daily trading value of $5 million. Securities that meet these eligibility
thresholds are ranked in descending order by dollar dividend increase over the
previous five year period and current dividend yield and ascending order by
payout ratio. These ranks are aggregated into a single score with the 50
securities with the lowest aggregate rank selected for inclusion in the Index
and are equally weighted. A review is then undertaken to determine if the Index
has exposure to any Industry Classification Benchmark industry in excess of 30%.
If the Index has exposure to an industry in excess of 30%, the highest-ranking
component within that industry is removed and replaced with the next-ranked
eligible security from a different industry. The Index is reconstituted annually
and rebalanced quarterly.
12
The Fund will seek
additional cash flow in the form of premiums on the options. A premium is the
income received by an invest or who sells an option
contract to another party. The call options sold by the Fund on the S&P
500® Index are anticipated to be cash
settled European style options that can only be exercised at the expiration
date. These call options will give the purchaser the right to receive from the
seller (the Fund) a cash payment at the option expiration date equal to any
positive difference between the value of the S&P 500® Index at the contract expiration and
the strike price. In the event the S&P 500® Index appreciates above the strike
price as of the expiration date of the written option and the buyer exercises
the option, the Fund as the writer (seller) of the call option will have to pay
the difference between the value of the S&P 500® Index and the strike price (which
loss is partially offset by the premium initially received). In such a scenario
the Fund may need to sell some of the equity securities it holds to make this
payment. In the event the S&P 500® Index declines in value, the call
option may end up worthless and the Fund as the writer (seller) of the call
option retains the premium. The call options sold by the Fund on an Underlying
ETF are anticipated to be physically settled American style options which are
exercisable any time prior to the expiration date. In the event the purchaser
exercises these call options, the Fund is obligated to deliver shares of the
Underlying ETF at the strike price. In such a scenario the Fund may need to sell
some of the equity securities it holds to fund the purchase of the shares of the
Underlying ETF it would deliver. In the event the Underlying ETF declines in
value, the call option may end up worthless and the Fund as the writer (seller)
of the call option retains the premium.
Each week, the Fund
compares the dividend income of the equity securities held by the Fund against the Fund’s
target distribution and looks to bridge that difference with the premiums that
come from selling call options. By combining premiums collected from the sale of
calls with the dividend income of the equity securities, the Fund seeks to
increase total income for investors while still participating in some of the
growth potential from the price appreciation of the stocks held by the Fund. The
call options written by the Fund will have expirations of less than 30 days, and
will be typically written at-the-money. An at-the-money call option has a strike
price that is approximately equal to the price of the S&P 500® Index or Underlying ETF at the time
the call option is sold. The notional amount of the options written as a
percentage of Fund' assets varies under different market conditions. In general,
the percentage will be higher when the market is less volatile, and the
percentage will be lower when market is more volatile. The notional amount is
the total underlying amount of the options. It is equal to the underlying asset
price multiplied by the number of options contracts multiplied by 100. The
Fund's strategy may involve frequently buying and selling portfolio
securities.
The Fund is classified as
“non-diversified” under the 1940 Act.
Fund
Investments
Principal
Investments
Equity
Securities
The
Fund invests in equity securities, including common stocks and depositary
receipts. Common stock represents an equity ownership interest in
issuers. Holders of common stock are entitled to the income and increase in the
value of the assets and business of the issuers after all debt obligations and
obligations to preferred stockholders are satisfied. Depositary receipts are
certificates typically issued by a bank or trust company that represent
ownership interests in securities of non-U.S. companies. Depositary receipts may
or may not be jointly sponsored by the underlying issuer.
Options
Contracts
The Fund sells
(writes) options contracts. An option represents a contract sold by one party
(the option writer) to another party (the option holder). For an
index call option, the buyer has the right to receive from the seller a cash
payment at the option expiration date equal to any positive difference between
the value of the index at the contract expiration and the strike price. For a call option on an
underlying ETF, the buyer has the right to purchase shares of the Underlying ETF
at the strike price. The buyer of a call option makes a cash payment (premium)
to the seller of the option upon entering into the option contract.
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.
13
Non-Principal
Investments
Illiquid
Investments
The
Fund may invest up to 15% of its net assets in investments and other instruments
that are, at the time of investment, illiquid (determined
using the Securities and Exchange Commission's standard applicable to investment
companies, i.e., any investment that
the Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment). For this purpose,
illiquid investments may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the “Securities
Act”),
that are deemed to be illiquid, and certain repurchase
agreements.
Cash
Equivalents and Short-Term Investments
Normally,
the Fund invests substantially all of its assets to meet its investment
objective. The Fund may invest the remainder of its assets in
securities with maturities of less than one year or cash equivalents, or it may
hold cash. The percentage of the Fund invested in such holdings varies and
depends on several factors, including market conditions. For temporary defensive
purposes and during periods of high cash inflows or outflows, the Fund may
depart from its principal investment strategies and invest part or all of its
assets in these securities, or it may hold cash. During such periods, the Fund
may not be able to achieve its investment objective. The Fund may adopt a
defensive strategy when the portfolio managers believe securities in which the
Fund normally invests have elevated risks due to political or economic factors
and in other extraordinary circumstances. For more information on eligible
short-term investments, see the SAI.
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
OPTIONS RISK. The use of
call options involves risks different from those associated with ordinary
portfolio securities transactions and depends on the ability of the Fund's
portfolio managers to forecast market movements correctly. As the seller
(writer) of a call option, the Fund will lose money if the value of the
reference index or security rises above the strike price and the buyer exercises the option;
however, such loss will be partially offset by any premium received from the
sale of the option. When writing a call option, the Fund will have no control
over the exercise of the option by the option holder. A number of factors may
influence the option holder’s decision to exercise the option, including the
value of the underlying security or index, price volatility, currency exchange
rates, dividend yield and interest rates. To the extent that these factors
increase the value of the call option, the option holder is more likely to
exercise the option, which may negatively affect the Fund. 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 reference index or security and there
may at times not be a liquid secondary market for certain options. Additionally,
the options on the S&P 500® Index may perform differently than
options on an ETF that tracks the S&P 500® Index due to differences in
14
the performance of
the Underlying ETF itself due to cash drag, differences between the portfolio of
the ETF and the components of the index, expenses and other
factors. Options may also involve the use of leverage, which could result in
greater price volatility than other securities.
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.
CURRENT
MARKET CONDITIONS RISK.
Current market conditions risk is the risk that a particular investment, or
shares of the Fund in general, may fall in value due to current market
conditions.
As a means to fight
inflation, which remains at elevated levels, the Federal Reserve and certain
foreign central banks have raised interest rates, and the
Federal Reserve has begun the process to reverse previously implemented
quantitative easing. U.S. regulators have proposed several changes to market and
issuer regulations which would directly impact the Fund. While it is hard to
predict whether any of these regulations will be adopted, due to the current
scope of proposed regulations, any regulatory changes could adversely impact the
Fund’s ability to achieve its investment strategies or make certain investments.
Regulatory changes may also increase Fund operational costs, which could impact
overall performance. Certain market factors may result in central banks changing
their approach in the future. Recent and potential future bank failures could
result in disruption to the broader banking industry or markets generally and
reduce confidence in financial institutions and the economy as a whole, which
may also heighten market volatility and reduce liquidity.
The ongoing
adversarial political climate in the United States, as well as political and
diplomatic events both domestic and abroad, such as presidential,
congressional and gubernatorial elections in the U.S., global elections and
governmental changes and the U.S. government’s failure to agree on a long-term
budget and deficit reduction plan, have and may continue to have an adverse
impact on the U.S. regulatory landscape, markets and investor behavior, which
could have a negative impact on the Fund’s investments and operations. The
potential result of a U.S. federal government shutdown may also significantly
impact investor and consumer behavior, which may adversely impact the markets
and global economy. Global and domestic authorities and regulators have
previously responded to serious economic disruptions with ranging fiscal and
monetary policy changes, including but not limited to, direct capital infusions
into companies, new monetary programs and dramatically lower interest rates. Any
change in these policies, or the ineffectiveness of these policies, could
increase volatility in securities markets, which may adversely impact the Fund’s
investments and performance. Any market disruptions could also delay the Fund
from making sound investment decisions in a timely manner. If the Fund
concentrates its investments in a region enduring geopolitical market
disruption, it may face higher risk of loss, although the increasing
interconnectivity between global economies and financial markets can lead to
events or conditions in one country, region or financial market adversely
impacting a different country, region or financial market.
Other unexpected
political, regulatory and diplomatic events within the U.S. and abroad may
affect investor and consumer confidence and may adversely impact
financial markets and the broader economy. For example, ongoing armed conflicts
between Russia and Ukraine in Europe and among Israel, Hamas and other militant
groups in the Middle East, have caused and could continue to cause significant
market disruptions and volatility within the markets in Russia, Europe, the
Middle East and the United States. The hostilities and sanctions resulting from
those hostilities have and could continue to have a significant impact on
certain Fund investments as well as Fund performance and liquidity. The
economies of the United States and its
15
trading partners, as
well as the financial markets generally, may be adversely impacted by trade
disputes and other matters. For example, the United States has
imposed trade barriers and restrictions on China. In addition, the Chinese
government is engaged in a longstanding dispute with Taiwan, continually
threatening an invasion. If the political climate between the United States and
China does not improve or continues to deteriorate, if China were to attempt
invading Taiwan, or if other geopolitical conflicts develop or worsen,
economies, markets and individual securities may be adversely affected, and the
value of the Fund’s assets may go down. The COVID-19 global pandemic, or any
future public health crisis, 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 vaccines have been developed, there is no guarantee that
vaccines will be effective against emerging future variants of the disease. As
this global pandemic illustrated, such events may affect certain geographic
regions, countries, sectors and industries more significantly than
others.
Advancements in
technology may also adversely impact markets and the overall performance of the
Fund. For instance, the economy may be significantly impacted
by the advanced development and increased regulation of artificial intelligence.
As the use of technology grows, liquidity and market movements may be affected.
As artificial intelligence is used more widely, the profitability and growth of
Fund holdings may be impacted, which could significantly impact the overall
performance of the Fund.
These events, and
any other future events, may adversely affect the prices and liquidity of the
Fund’s portfolio investments and could result in disruptions in
the trading markets.
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 attacks, there are inherent limitations in such
plans and systems, including the possibility that certain risks have not been
identified and that prevention and remediation efforts will not be successful.
Furthermore, the Fund cannot control the cyber security plans and systems put in
place by service providers to the Fund, issuers in which the Fund invests,
market makers or authorized participants. However, there is no guarantee that
such efforts will succeed, and the Fund and its shareholders could be negatively
impacted as a result.
DEPOSITARY
RECEIPTS RISK. The Fund may invest
in depositary receipts. Depositary receipts are securities issued by a bank or
trust company reflecting ownership of underlying securities issued by a foreign
company. An investment in depositary receipts involves further risks due to
certain unique features. Any distributions paid to the holders of depositary
receipts are usually subject to a fee charged by the depositary. Holders of
depositary receipts may have limited voting rights pursuant to a deposit
agreement between the underlying issuer and the depositary. In certain cases,
the depositary will vote the shares deposited with it as directed by the
underlying issuer’s board of directors. Furthermore, investment restrictions in
certain countries may adversely impact the value of depositary receipts because
such restrictions may limit the ability to convert shares into depositary
receipts and vice versa. Such restrictions may cause shares of the underlying
issuer to trade at a discount or premium to the market price of the depositary
receipt. Moreover, if depositary receipts are converted into shares, the laws in
certain countries may limit the ability of a non-resident to trade the shares
and to reconvert the shares to depositary receipts. Depositary receipts may be
“sponsored” or “unsponsored.” Sponsored depositary receipts are established
jointly by a depositary and the underlying issuer, whereas unsponsored
depositary receipts may be established by a depositary without participation by
the underlying issuer. Holders of unsponsored depositary receipts generally bear
all the costs associated with establishing
16
the
unsponsored depositary receipts. In addition, the issuers of the securities
underlying unsponsored depositary receipts are not obligated to
disclose material information in the U.S. and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the depositary
receipts.
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 use of leverage may also
cause the Fund to liquidate portfolio positions when it would not be
advantageous to do so. The use of leveraged derivatives can magnify potential
for gain or loss and, therefore, amplify the effects of market volatility on
share price.
DISTRIBUTION
TAX RISK. The Fund
currently expects to make distributions on a regular basis. While the Fund will
normally pay its income as distributions, the Fund's distributions may exceed
the Fund's income and gains for the Fund's taxable year. The Fund may be
required to reduce its distributions if it has insufficient income.
Additionally, there may be times the Fund needs to sell securities when it would
not otherwise do so in order to settle an option position, which could result in
the distribution of premium from that option position being classified as a
return of capital. This occurs because while the distribution consisted of the
premium received from the sale of the call option, the Fund later sold
securities to generate proceeds to settle that call option. Distributions in
excess of the Fund's current and accumulated earnings and profits will be
treated as a return of capital. Distributions in excess of the Fund's minimum
distribution requirements, but not in excess of the Fund's earnings and profits,
will be taxable to Fund shareholders and will not constitute nontaxable returns
of capital. A return of capital distribution generally will not be taxable but
will reduce the shareholder's cost basis and will result in a higher capital
gain or lower capital loss when those Fund shares on which the distribution was
received are sold. Once a Fund shareholder's cost basis is reduced to zero,
further distributions will be treated as capital gain, if the Fund shareholder
holds shares of the Fund as capital assets. Additionally, any capital returned
through distributions will be distributed after payment of Fund fees and
expenses. Because the Fund's distributions may consist of return of capital, the
Fund may not be an appropriate investment for investors who do not want their
principal investment in the Fund to decrease over time or who do not wish to
receive return of capital in a given period. In the event that a shareholder
purchases shares of the Fund shortly before a distribution by the Fund, the
entire distribution may be taxable to the shareholder even though a portion of
the distribution effectively represents a return of the purchase
price.
The Fund’s
investment strategy may limit its ability to distribute dividends eligible for
treatment as qualified dividend income, which for non-corporate shareholders
are subject to federal income tax at rates of up to 20%. The Fund’s investment
strategy may also limit its ability to distribute dividends eligible for the
dividends-received deduction for corporate shareholders. For these reasons, a
significant portion of distributions received by Fund shareholders may be
subject to tax at effective tax rates that are higher than the rates that would
apply if the Fund were to engage in a different investment
strategy.
DIVIDENDS
RISK.
The Fund invests in dividend-paying securities. The Fund’s investment in
dividend-paying securities could cause the Fund to underperform similar funds
that invest without consideration of an issuer’s track record of paying
dividends. Companies that issue dividend-yielding securities are not required to
continue to pay dividends on such securities. Therefore, there is the
possibility that such companies could reduce or eliminate the payment of
dividends in the future especially if the companies are facing an economic
downturn, which could negatively affect the Fund’s
performance.
EQUITY
SECURITIES RISK. The value of the
Fund’s shares will fluctuate with changes in the value of the equity securities
in which it invests.
Equity
securities prices fluctuate for several reasons, including changes in investors'
perceptions of the financial condition of an issuer or the general condition of
the relevant equity market, such as market volatility, or when political or
economic events affecting the issuers occur. Common stock prices may be
particularly sensitive to rising interest rates, as the cost of capital rises
and borrowing costs increase. Equity securities may decline significantly in
price over short or extended periods of time, and such declines may occur in the
equity market as a whole, or they may occur in only a particular country,
company, industry or sector of the market. Additionally, holders of an issuer's
common stock may be subject to greater risks than holders of its preferred stock
and debt securities because common stockholders' claims are subordinated to
those of holders of preferred stocks and debt securities upon the bankruptcy of
an issuer.
17
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.
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. 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. 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.
LARGE
CAPITALIZATION COMPANIES RISK. Large capitalization
companies may grow at a slower rate and be less able to adapt to changing market
conditions than smaller capitalization companies. Thus, the return on investment
in securities of large capitalization companies may be less than the return on
investment in securities of small and/or mid capitalization companies. The
performance of large capitalization companies also tends to trail the overall
market during different market cycles.
LEVERAGE
RISK. The Fund has
exposure to instruments subjecting them to 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 the Fund’s exposure to an asset or class of assets and
may cause the value of the Fund’s portfolio and the 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.
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 trade 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
18
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 investment, or shares of the Fund in general, may fall in
value. Securities are subject to market fluctuations caused by real or perceived
adverse economic, political, and regulatory factors 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. In addition,
local, regional or global events such as war, acts of terrorism, market
manipulation, government defaults, government shutdowns, regulatory actions, political
changes, diplomatic developments, the imposition of sanctions and other
similar measures, spread of infectious diseases or other public health issues,
recessions, natural disasters, or other events could have a significant
negative impact on the Fund and its investments. Any of such circumstances could
have a materially negative impact on the value of the Fund’s shares, the liquidity of an investment, and
may 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, the bid/ask spread on the Fund’s
shares may widen and the Fund's annual distribution rate may
fall.
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.
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.
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, including the Sub-Advisor,
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.
OPTIONS
RISK. The Fund utilizes
options. 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 the seller (writer)
of a call option, the Fund will lose money if the value of the reference index
or security rises above the strike price and the buyer exercises the option;
however, such loss will be partially offset by any premium received from the
sale of the option. 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
19
of options and their
underlying securities and there may at times not be a liquid secondary market
for certain options. There may be times the Fund needs to sell
securities in order to settle an option position, which could result in the
distribution of premium from that option position being classified as a return
of capital and make the Fund less tax-efficient than other ETFs. Options may
also involve the use of leverage, which could result in greater price volatility
than other securities.
PORTFOLIO
CORRELATION RISK. The
Fund’s portfolio is composed of both equity securities and written call options.
Because the equity securities held by the Fund are securities contained in the
Index and the options are written on the S&P 500® Index or ETFs that track the S&P
500® Index, the Fund's investments are
not correlated, meaning their performance is independent of one another. Market
events may impact one position held by the Fund more than the other position and
the returns from the Fund's investments in equity securities and written call
options may not move in the same direction as one another.
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.
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.
SMALLER
COMPANIES RISK. The Fund invests in
the securities of small and/or mid capitalization companies. The stock price of
small and/or mid capitalization companies may be more volatile than those of
larger companies and therefore the Fund’s share price may be more volatile than
those of funds that invest a larger percentage of their assets in stocks issued
by large capitalization companies. Stock prices of small and/or mid
capitalization companies are also generally more vulnerable than those of large
capitalization companies to adverse business and economic developments.
Securities of small and/or mid capitalization companies may be thinly traded,
making it difficult for the Fund to buy and sell them. In addition, small and/or
mid capitalization companies are typically less financially stable than larger,
more established companies and may reinvest a high proportion of their earnings
in their business and may not pay dividends. Small and/or mid capitalization
companies may also depend on a small number of essential personnel who may also
be less experienced than the management of larger companies, making these
companies more vulnerable to experiencing adverse effects due to the loss or
inexperience of personnel. Small and/or mid capitalization companies also
normally have less diverse product lines than those of large capitalization
companies and are more susceptible to adverse developments concerning their
products.
TAX
RISKS ASSOCIATED WITH INVESTMENT IN OPTIONS. The Fund may invest a portion of its
assets in options on indexes. The treatment of such derivatives may, in part, be
based upon informal guidance issued by the Internal Revenue Service a number of
years ago. Although the Fund believes that it is treating such derivatives
consistently with current tax law, if the Internal Revenue Service were to
disagree, the Fund could lose its status as a RIC. The Fund may also invest a
portion of its assets in certain options on an Underlying ETF that may not
qualify as "Section 1256 contracts" under Section 1256 of the Code, and
disposition of such options will likely result in short-term or long-term
capital gains or losses.
If
the Fund did not qualify as a RIC for any taxable year and certain relief
provisions were not available, the Fund’s taxable income would be
subject to tax at the Fund level and to a further tax at the Shareholder level
when such income is distributed. In such event, in order to re-qualify for
taxation as a RIC, the Fund might be required to recognize unrealized gains, pay
substantial taxes and interest and make certain distributions. This would cause
investors to incur higher tax liabilities than they otherwise would have
incurred and would have a negative impact on Fund returns. In such event, the
Fund’s Board of
20
Trustees
may determine to reorganize or close the Fund or materially change the Fund’s
investment objective and strategies. In the event that the
Fund fails to qualify as a RIC, the Fund will promptly notify Shareholders of
the implications of that failure.
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 Fund may hold
securities or other assets that may be valued on the basis of factors other than
market quotations. This may occur in times of market turmoil or reduced
liquidity. There are multiple methods that can be used to value a portfolio
holding when market quotations are not readily available. The value established
for any portfolio holding at a point in time might differ from what would be
produced using a different methodology or if it had been priced using market
quotations. Portfolio holdings that are valued using techniques other than
market quotations, including “fair valued” assets or securities, may be subject
to greater fluctuation in their valuations from one day to the next than if
market quotations were used. In addition, there is no assurance that the Fund
could sell or close out a portfolio position for the value established for it at
any time, and it is possible that the Fund would incur a loss because a
portfolio position is sold or closed out at a discount to the valuation
established by the Fund at that time. The Fund’s ability to value investments
may be impacted by technological issues or errors by pricing services or other
third-party service providers.
Non-Principal
Risks
BORROWING
AND LEVERAGE RISK. If the Fund borrows
money, it must pay interest and other fees, which may reduce the Fund’s returns.
Any such borrowings are intended to be temporary. However, under certain market
conditions, including periods of decreased liquidity, such borrowings might be
outstanding for longer periods of time. As prescribed by the 1940 Act, the Fund
will be required to maintain specified asset coverage of at least 300% with
respect to any bank borrowing immediately following such borrowing and at all
times thereafter. The Fund may be required to dispose of assets on unfavorable
terms if market fluctuations or other factors reduce the Fund’s asset coverage
to less than the prescribed amount.
CASH
TRANSACTIONS RISK. The Fund may, under
certain circumstances, effect a portion of its creations and redemptions for
cash rather than in-kind. As a result, an investment in the Fund may be less
tax-efficient than an investment in an 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 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.
DEPENDENCE
ON KEY PERSONNEL RISK. The Sub-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
Sub-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 Sub-Advisor.
ISSUER
SPECIFIC CHANGES RISK. The value of an
individual security or particular type of security can be more volatile than the
market as a whole and can perform differently from the value of the market as a
whole.
LEGISLATION/LITIGATION
RISK.
From time to time, various legislative initiatives are proposed in the United
States and abroad, which may have a negative impact on certain companies in
which the Fund invests. In addition, litigation regarding any of the issuers of
the securities owned by the Fund, or industries represented by these issuers,
may negatively impact the value of
21
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.
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, Sub-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 selection and ongoing monitoring of the securities in the
Fund’s portfolio and certain other services necessary for the management of the
portfolios.
First
Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace
Partners of DuPage L.P. is a limited partnership with one general partner, The
Charger Corporation, and a number of limited partners. The Charger Corporation
is an Illinois corporation controlled by James A. Bowen, the Chief Executive
Officer of First Trust. First Trust discharges its responsibilities subject to
the policies of the Fund.
First Trust serves
as advisor or sub-advisor for 11 mutual fund portfolios, 10
exchange-traded funds consisting of 237 series and 13 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.
The Trust, on behalf
of the Fund, and First Trust have retained Vest Financial LLC ("Vest" or the "Sub-Advisor") to serve as investment sub-advisor
pursuant to a sub-advisory agreement (the "Sub-Advisory
Agreement"). In this
capacity, Vest is responsible for the selection and ongoing monitoring of the
securities in the Fund’s investment portfolio. Vest, with principal offices at
8350 Broad St., Suite 240, McLean, Virginia 22102, was founded in 2012, and is a
Delaware LLC. Vest had approximately $21.7 billion under management or committed
to management as of December 31, 2023.
The Sub-Advisor is a
subsidiary of Vest
Group, Inc. (“VG”). First Trust Capital Partners, LLC
(“FTCP”), an affiliate of First Trust, is
the largest single holder of voting shares in VG.
Karan
Sood and Howard Rubin are the Fund’s portfolio managers and are jointly and
primarily responsible for the day-to-day management of the
Fund’s investment portfolios.
•
Mr. Sood has over ten years of
experience in derivative based investment strategy design and trading. Mr. Sood
joined Vest in June 2012. Prior to joining Vest, Mr. Sood worked at ProShares
Advisors LLC. Prior to ProShares, Mr. Sood worked as a Vice President at
Barclays Capital. Last based in New York, he was responsible for using
derivatives to design structured investment strategies and solutions for the
firm’s institutional clients in the Americas. Prior to his role in New York, Mr.
Sood worked in similar capacity in London with Barclays Capital’s European
clients. Mr. Sood received a master’s degree in Decision Sciences &
Operations Research from London School of Economics & Political Science. He
also holds a bachelor’s degree in engineering from the Indian Institute of
Technology, Delhi.
•
Mr. Rubin has over twenty-five years
of experience as a portfolio manager. Mr. Rubin joined Vest in August 2017.
Prior to joining Vest, Mr. Rubin served as Director of Portfolio Management at
ProShares Advisors LLC from December 2007 to September 2013. Mr. Rubin also
served as Senior Portfolio Manager of ProFund Advisors LLC from November 2004 to
December 2007 and Portfolio Manager of ProFund Advisors LLC from April 2000
through November 2004. Mr. Rubin holds the Chartered Financial Analyst (CFA)
designation. Mr. Rubin received a master’s degree in Finance from George
Washington University. He also holds a bachelor’s degree in economics from
Wharton School of Finance, University of Pennsylvania.
For
additional information concerning First Trust and the Sub-Advisor, 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.
22
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
oversees the Sub-Advisor’s management of the Fund’s assets and pays the
Sub-Advisor for its services as Sub-Advisor. First Trust is paid an annual
unitary management fee by the Fund equal to 0.75% of the Fund's average daily
net assets and is responsible for the Fund's expenses, including the cost of
transfer agency, sub-advisory, custody, fund administration, legal, audit and
other services, but excluding fee payments under the Investment Management
Agreement, interest, taxes, brokerage commissions and other expenses connected
with the execution of portfolio transactions, distribution and service fees
payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses.
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
and Investment Sub-Advisory Agreement is
available in the Fund's Annual Report to Shareholders for the fiscal period
ended October 31, 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, 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) or 3(c)(7) of the 1940 Act
is subject to the restrictions of Section 12(d)(1) of the 1940 Act and the
related rules and interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is
the record owner of all outstanding shares of the Fund and is recognized as the
owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all
shares. Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book-entry or “street name” form.
Share
Trading Prices
The
trading price of shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and
can be affected by market forces of supply and demand, economic conditions and
other factors.
23
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.
Dividends,
Distributions and Taxes
The
Fund has implemented a distribution policy pursuant to which the Fund intends to
declare and pay monthly dividends to shareholders at an
annual rate that is approximately 8.0% (before fees and expenses) over the
current annual dividend yield of the S&P 500® Index. The Board may
amend this distribution policy at any time, or the Fund may cease distributions
entirely, at any time.
Under
the distribution policy, to the extent that sufficient investment income is not
available on a monthly basis, some or all of the Fund’s
distributions could consist primarily or entirely of return of capital, as
discussed below, in order to maintain the distribution rate. The amount treated
as a return of capital will reduce a shareholder’s cost basis in the
shareholder’s shares, thereby increasing the potential gain or reducing the
potential loss on the sale of shares. Investors should not make any conclusions
about the Fund’s investment performance from the amount of the Fund’s
distributions or from the terms of the Fund’s distribution policy.
The
Fund may at times, in its discretion, pay out less than the entire amount of net
investment income earned in any particular period and may at
times pay out such accumulated undistributed income in addition to net
investment income earned in other periods in order to permit the Fund to
maintain a more stable level of distributions. As a result, the dividend paid by
the Fund to shareholders for any particular period may be more or less than the
amount of net investment income earned by the Fund during such
period.
Dividends
from net investment income of the Fund, 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. However, with respect to certain tax issues, the
summaries describe the general tax treatment of certain distributions made to
corporations and non-U.S. persons. 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.
24
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 three
categories: ordinary income distributions, capital gain dividends and returns of
capital. Ordinary income distributions are generally taxed at your ordinary tax
rate, however, as further discussed below, certain ordinary income distributions
received from the Fund may be taxed at the capital gains tax rates. Generally,
you will treat all capital gain dividends as long-term capital gains regardless
of how long you have owned your shares.
To determine your
actual tax liability for your capital gain dividends, you must calculate your
total net capital gain or loss for the tax year after considering all of
your other taxable transactions, as described below. In addition, the Fund may
make distributions that represent a return of capital for tax purposes and thus
will generally not be immediately taxable to you to the extent of your basis in the
shares. 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.
If a return of capital exceeds your basis in the shares, you will recognize
long-term or short-term gains, depending on your holding period. 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 the 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 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. However, certain ordinary income dividends on shares
that are attributable to qualifying dividends received by the Fund from certain
corporations may be reported by the Fund as being eligible for the dividends
received deduction.
Capital
Gains and Losses and Certain Ordinary Income Dividends
If
you are an individual, the maximum marginal stated federal tax rate for net
capital gains is generally 20% (15% or 0% for taxpayers with
taxable incomes below certain thresholds). Some capital gains, including some
portion of your capital gain dividends may be taxed at a higher maximum stated
tax rate. Capital gains may also be subject to the Medicare tax described
above.
Net
capital gain equals net long-term capital gain minus net short-term capital loss
for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your shares to determine your holding period. However, if you receive a
capital gain dividend from the Fund and sell your shares at a loss after holding
them 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.
Ordinary
income dividends received by an individual shareholder from a RIC such as the
Fund are generally taxed at the same rates that apply to
net capital gain (as discussed above), provided certain holding period
requirements are satisfied and provided the dividends are attributable to
qualifying dividends received by the Fund itself. The Fund will provide notice
to its shareholders of the amount of any distribution which may be taken into
account as a dividend which is eligible for the capital gains tax rates.
25
When
the Fund lends portfolio securities to a borrower as described in the
“Investment Strategies- Lending of Portfolio Securities” section
of the SAI, payments in lieu of dividends made by the borrower to the Fund will
not constitute “qualified dividends” taxable at the same rate as long-term
capital gains, even if the actual dividends would have constituted qualified
dividends had the Fund held the securities. Such payments in lieu of dividends
are taxable as ordinary income.
Options
The Fund intends to
treat any income it may derive from the options as “qualifying income” under the
provisions of the Code applicable to RICs. In addition,
based upon language in the legislative history, the Fund intends to treat the
issuer of the options as the issuer of the referenced asset, which, assuming the
referenced asset qualifies as a RIC, would allow the trust to qualify for
special rules in the RIC diversification requirements. If the referenced asset
is an index, the Fund intends to treat the issuer of the options as the issuer
of the securities comprising the index. If the income is not qualifying income
or the issuer of the options is not appropriately the referenced asset, the Fund
could lose its own status as a RIC if the positions reflected by such options
are large enough.
Straddles
The Fund may sell
call options that have a value that varies inversely with assets in the Fund’s
portfolio. If the assets held and the options sold are determined to be
straddles (offsetting positions), the amount of long-term capital gain available
for distribution as a capital gain dividend may be reduced. Because of the
potential loss of long-term capital gains from portfolio investments, in some
factual circumstances investors could have a lower after-tax return from
investing in the Fund than investing directly in the referenced
asset.
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
26
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. 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.
It
is the responsibility of the entity through which you hold your shares to
determine the applicable withholding.
Investments
in Certain Non-U.S. Corporations
If
the Fund holds an equity interest in any “passive foreign investment companies”
(“PFICs”), which are
generally certain non-U.S. corporations that receive at least 75% of their
annual gross income from passive sources (such as interest, dividends, certain
rents and royalties or capital gains) or that hold at least 50% of their assets
in investments producing such passive income, the Fund could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its shareholders. The Fund will not be able to
pass through to its shareholders any credit or deduction for such taxes. The
Fund may be able to make an election that could ameliorate these adverse tax
consequences. In this case, the Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, the Fund might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax. Dividends paid by PFICs are not treated as qualified dividend
income.
Distribution
Plan
FTP
serves as the distributor of Creation Units for the Fund on an agency basis. FTP
does not maintain a secondary market in shares.
The
Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. In accordance with the Rule 12b-1 plan, the
Fund is authorized to pay an amount up to 0.25% of its average daily net assets
each year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional
services.
The Fund does not
currently pay 12b-1 fees, and pursuant to a contractual arrangement, the Fund
will not pay 12b-1 fees any time before March 31, 2025. 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 (“NAV”) is determined as of the close of
regular trading (normally 4:00 p.m., Eastern Time) on each day the New York
Stock Exchange (“NYSE”) is open for trading. If the NYSE
closes early on a valuation day, the Fund’s NAV will be determined as of that time.
The Fund’s NAV is calculated by dividing the value of
the net assets of the Fund (i.e., the value of its total assets less
total liabilities) by the total number of outstanding shares of the Fund, generally rounded to the
nearest cent.
27
Section 2(a)(41) of the 1940 Act provides that when a
market quotation is readily available for a fund’s portfolio investment, it must
be valued at the market value. Rule 2a-5 under the 1940 Act (“Rule
2a-5”) defines a readily available market
quotation as “a quoted price (unadjusted) in active markets for identical investments that the
fund can access at the measurement date, provided that a quotation will not be
readily available if it is not reliable.” If a market quotation is
not
“readily
available,” then the portfolio investment must be
fair valued as determined in good faith by a fund’s board of
trustees.
Rule 2a-5 permits a
fund’s board of trustees to designate the fund’s investment adviser as its
“valuation designee” to perform fair value determinations, subject to
certain conditions. Accordingly, the Fund’s Board has designated First Trust as
its valuation designee (the “Valuation
Designee”) pursuant to
Rule 2a-5 and has directed the Valuation Designee to perform the functions
required in Rule 2a-5(a) subject to the requirements of Rule 2a-5(b) on behalf
of all portfolio investments of the Fund, subject to the Board’s oversight.
First Trust has established a pricing committee (the “Pricing
Committee”) to assist in
the administration of the duties of the Valuation Designee. The Valuation
Designee has adopted valuation procedures for the First Trust Funds (the
“Valuation
Procedures”), a brief
summary of which is set forth below.
The Pricing
Committee has identified certain portfolio investments that are routinely
categorized as having a readily available market quotation. The market value of
an investment with a readily available market quotation is typically determined
on the basis of official closing prices or last reported sale prices or
equivalent price, although this can vary based on investment type and/or the
availability of such prices.
The Pricing
Committee has also identified certain portfolio investments that are routinely
categorized as fair valued investments. In general, for such investments, the
Fund’s accounting agent will obtain all pricing data for use in valuing such
investments from a pricing service provider approved by the Pricing Committee
(each, a “Pricing Service
Provider”), subject to
the oversight of the Pricing Committee. Pricing Service Providers typically
value non-exchange-traded instruments utilizing a range of market-based inputs
and assumptions. For example, when available, Pricing Service Providers may
utilize inputs such as benchmark yields, reported trades, broker-dealer quotes,
spreads, and transactions for comparable instruments. In pricing certain
instruments, a Pricing Service Provider may consider information about an
instrument’s issuer or market activity. Pricing Service Provider valuations of
non-exchange-traded instruments generally represent the service’s good faith
opinion as to what the holder of an instrument would receive in an orderly
transaction for an institutional round lot position under current market
conditions. Certain exchange-traded options, such as FLEX Options, are typically
valued using a model-based price provided by a Pricing Service
Provider.
Portfolio
investments trading on foreign exchanges or over-the-counter markets that close
prior to the close of the NYSE may be fair valued using a systematic
fair valuation model provided by a Pricing Service Provider. If these foreign
securities meet certain criteria in relation to the valuation model, their
valuation is systematically adjusted to reflect the impact of movement in the
U.S. market after the close of certain foreign markets.
If
no price is available from a Pricing Service Provider or if the Pricing Committee has reason to question the accuracy or the
reliability of a price supplied for a portfolio investment
or the use of amortized cost, the Pricing Committee will determine
the fair value of such portfolio investment in a manner that it believes most
appropriately reflects the fair value of the portfolio investment on the valuation
date (a “Special Fair
Value Pricing Situation”). In a Special Fair Value Pricing
Situation, the Pricing Committee will determine a fair value
price subject to the process outlined in
the Valuation Procedures and based on a consideration of all available
information to the Pricing Committee at the time of the
determination.
Additionally, for
foreign securities, if an extraordinary market event occurs between the time the
last “current” market quotation is available for a security in the
Fund’s portfolio and the time the Fund’s NAV is determined that calls into doubt
whether that earlier market quotation represents fair value at the time the
Fund’s NAV is determined, the Pricing Committee will determine the fair
valuation as set forth in the Valuation Procedures.
Fair value represents a good faith approximation
of the value of a portfolio investment and is the amount the Fund might
reasonably expect to receive from the current sale of that investment in an arm’s-length
transaction. Valuing the Fund’s investments using
fair value pricing will result in prices that may differ from current market
valuations, if any, and that may not be the
prices at which those investments could have been sold
during the period in which the particular fair values were used. While the Valuation Procedures and
Valuation Designee’s processes are intended to result in the Fund’s NAV
calculation that fairly reflects the values as of the time of
pricing, the fair value determined for a
portfolio instrument may be materially different from the value that could be
realized upon the sale of that instrument.
28
Foreign currencies
are translated into U.S. dollars at the exchange rate of such currencies against
the U.S. dollar as provided by a Pricing Service Provider. All
assets denominated in foreign currencies will be 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 South Canal St., Chicago, Illinois
60606, serves as legal counsel to the Fund. First Trust serves as the fund
reporting agent for the Fund.
Disclaimers
The
Nasdaq US Rising Dividend AchieversTM Index is determined,
composed and calculated by Nasdaq, Inc. The Fund is not sponsored, endorsed,
sold or promoted by Nasdaq, Inc. or its affiliates (Nasdaq, Inc., with its
affiliates, are referred to as the “Corporations”). The Corporations
have not passed on the legality or suitability of, or the accuracy or adequacy
of descriptions and disclosures relating to, the Fund. The Corporations make no
representation or warranty, express or implied to the owners of the Fund or any
member of the public regarding the advisability of investing in securities
generally or in the Fund particularly, or the ability of the Fund to track
general market performance. The Corporations’ only relationship to First Trust
is in the licensing of “Nasdaq” and the Index’s registered trademarks, trade
names and service marks of the Corporations and the use of the Index which is
determined, composed and calculated by the Corporations without regard to First
Trust or the Fund. Nasdaq, Inc. has no obligation to take the needs of First
Trust or the owners of the Fund into consideration in determining, composing or
calculating the Index. The Corporations are not responsible for and have not
participated in the determination of the timing of, prices at, or quantities of
the Fund to be issued or in the determination or calculation of the equation by
which the Fund is to be converted into cash. The Corporations have no liability
in connection with the administration, marketing or trading of the
Fund.
THE
CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF
THE INDEX OR ANY DATA INCLUDED
THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO
BE OBTAINED BY FIRST TRUST, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL,
INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
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.
29
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the periods shown. Certain information
reflects financial results for a single share of the Fund. The total returns
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
information for the periods indicated has been derived from financial statements
audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, is included in the Fund's Annual Report to Shareholders
dated October 31, 2023 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 each period
For a share outstanding throughout each period
FT Vest Rising
Dividend Achievers Target Income ETF (RDVI)
|
|
Year
Ended October 31, |
Period
Ended
10/31/2022(a) |
|
|
2023 | |
|
Net
asset value, beginning of period |
$21.21 |
$19.79 |
|
Income
from investment operations: |
|
|
|
Net
investment income (loss) |
0.44
(b) |
0.00
(c) |
|
Net
realized and unrealized gain (loss) |
0.47
(d) |
1.42 |
|
Total
from investment operations |
0.91 |
1.42 |
|
Distributions
paid to shareholders from: |
|
|
|
Net
investment income |
(0.47
) |
— |
|
Net
realized gain |
(1.48
) |
— |
|
Total
distributions |
(1.95
) |
— |
|
Net
asset value, end of period |
$20.17 |
$21.21 |
|
Total
Return (e) |
4.02
% |
7.18
% |
|
Ratios/supplemental
data: |
|
|
|
Net
assets, end of period (in 000’s) |
$476,045 |
$2,121 |
|
Ratios
to average net assets: |
|
|
|
Ratio of
total expenses to average net assets |
0.75
% |
0.75
%(f) |
|
Ratio of
net investment income (loss) to average net assets |
2.07
% |
1.47
%(f) |
|
Portfolio
turnover rate (g) |
86
% |
0
% |
(a)
Inception
date is October 19, 2022, which is consistent with the commencement of
investment operations and is the date the initial creation units were
established.
(b)
Based on
average shares outstanding.
(c)
Amount
represents less than $0.01.
(d)
Realized and
unrealized gains (losses) per share are balancing amounts necessary to reconcile
the change in net asset value per share for the period and may not reconcile
with the aggregate gains and losses in the Statement of Operations due to share
transactions for the period.
(e)
Total return is
calculated assuming an initial investment made at the net asset value at the
beginning of the period, reinvestment of all distributions at net asset value
during the period, and redemption at net asset value on the last day of the
period. The returns presented do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not
annualized for periods of less than a year.
(f)
Annualized.
(g)
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.
30
Other
Information
Continuous
Offering
The
Fund issues, on a continuous offering basis, its shares in one or more groups of
a fixed number of Fund shares (each such group of such
specified number of individual Fund shares, a “Creation
Unit Aggregation”). The method by
which Creation Unit Aggregations of Fund shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of shares are issued and sold by the Fund on an ongoing basis, a
“distribution,” as such term is used in the Securities Act, may occur at any
point. Broker-dealers and other persons are cautioned that some activities on
their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an
order with FTP, breaks them down into constituent shares and sells such shares
directly to customers, or if it chooses to couple the creation of a supply of
new shares with an active selling effort involving solicitation of secondary
market demand for shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a characterization
as an underwriter.
Broker-dealer
firms should also note that dealers who are not “underwriters” but are effecting
transactions in shares, whether or not participating
in the distribution of shares, are generally required to deliver a prospectus.
This is because the prospectus delivery exemption in Section 4(a)(3) of the
Securities Act is not available in respect of such transactions as a result of
Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that
dealers who are not underwriters but are participating in a distribution (as
contrasted with ordinary secondary market transactions) and thus dealing with
the shares that are part of an overallotment within the meaning of Section
4(a)(3)(C) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to shares are
reminded that, under the Securities Act Rule 153, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer
in connection with a sale on the Exchange is satisfied by the fact that the
prospectus is available from the Exchange upon request. The prospectus delivery
mechanism provided in Rule 153 is available with respect to transactions on a
national securities exchange, a trading facility or an alternative trading
system.
FTP, or its
affiliates, or a fund or unit investment trust for which FTP or an affiliate
serves as sponsor or investment advisor, may purchase shares of the Fund
through a broker-dealer or other investors, including in secondary market
transactions, and because FTP or its affiliates may be deemed affiliates of the
Fund, the shares are being registered to permit the resale of these shares from
time to time after any such purchase. The Fund will not receive any of the
proceeds from the resale of such shares.
31
|
First
Trust
Exchange-Traded
Fund IV |
FT Vest Rising Dividend Achievers
Target Income 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 reports, 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