FIRST TRUST
First Trust Exchange-Traded Fund IV
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First Trust Tactical High
Yield ETF (HYLS)
Annual Report
For the Year Ended
October 31, 2022
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TABLE OF CONTENTS
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2022
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 5
Understanding Your Fund Expenses............................................. 7
Portfolio of Investments..................................................... 8
Statement of Assets and Liabilities.......................................... 20
Statement of Operations...................................................... 21
Statements of Changes in Net Assets.......................................... 22
Statement of Cash Flows...................................................... 23
Financial Highlights......................................................... 24
Notes to Financial Statements................................................ 25
Report of Independent Registered Public Accounting Firm...................... 33
Additional Information....................................................... 34
Board of Trustees and Officers............................................... 40
Privacy Policy............................................................... 42
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Tactical High Yield ETF; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund's
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
www.ftportfolios.com or speak with your financial advisor. Investment returns,
net asset value and share price will fluctuate and Fund shares, when sold, may
be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of a relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2022
Dear Shareholders:
First Trust is pleased to provide you with the annual report for the First Trust
Tactical High Yield ETF (the "Fund"), which contains detailed information about
the Fund for the twelve months ended October 31, 2022.
As I'm writing this letter in mid-November, it strikes me that things appear to
be a little more chaotic in the current climate than normal. One of the things
that may have contributed to the chaotic nature of the news flow of late was the
November mid-term election. For the most part, except for a few seats in
Congress, the election is behind us. We learned there would be no "red wave"
(Republicans gaining a strong majority in Congress) but likely gridlock ahead.
Gridlock has been good for stock market investors in the past few decades,
particularly when there's been a Democratic president and the Republicans have
control of at least one house of Congress, according to Brian Wesbury, Chief
Economist at First Trust.
The Federal Reserve (the "Fed") has kept its promise to aggressively hike
interest rates to combat robust inflation. As of November 13, 2022, the Fed has
increased the Federal Funds target rate (upper bound) six times, from 0.25% to
4.00%. The Fed's actions have some investors and pundits looking for evidence
linking the interest rate hikes to a downturn in the economy. In short, the hope
is that a pullback in economic activity might deter the Fed from executing
further interest rate hikes. Fed Chairman Jerome Powell, however, recently said
that the terminal rate (the ultimate rate the Fed is targeting) will likely need
to be higher than previously estimated in order to curb stubbornly high
inflation. The Consumer Price Index ("CPI") is a commonly used measure of
inflation. The CPI stood at 7.7% on a trailing 12-month basis as of October 31,
2022, according to the U.S. Bureau of Labor Statistics. That is down from its
recent high of 9.1% in June 2022. Prior to this year, the last time the CPI was
higher than 7.0% was over 40 years ago. While monetary policy is an ongoing
process subject to change, the Fed does appear to be steadfast in its mission to
bring the rate of inflation back to its preferred level of 2.0%, and that will
take some time, in my opinion. Stay tuned!
Equity and fixed income markets have contended with numerous headwinds this
year, such as the war between Russia and Ukraine. Since setting its all-time
high of 4,796.56 on January 3, 2022, the S&P 500(R) Index has been in a bear
market (a price decline of 20% or more from the most recent high) for the better
part of 310 days. Suffice it to say, we are all looking forward to the end of
this bear market. With respect to corrections and bear markets, the silver
lining is that the S&P 500(R) Index has never failed to fully recover the losses
sustained in any previous downturn. Where might we see demand for stocks moving
forward? One such source could be stock buybacks. As of the last week of October
2022, U.S. companies had announced stock buybacks totaling $1 trillion so far
this year, according to Birinyi Associates. The fixed income market has not been
immune to selling pressure either. Year-to-date through November 10, 2022,
yields on the 10-Year Treasury Note increased by 258 basis points. As you may be
aware, bond yields and bond prices are inversely related, particularly with
respect to investment-grade bonds. As yields rise, prices fall and vice versa.
As noted above, the Fed has more work to do, so bond investors should not be
surprised to see interest rates and bond yields trend at least a bit higher in
the months ahead.
Thank you for giving First Trust the opportunity to play a role in your
financial future. We value our relationship with you and will report on the Fund
again in six months.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
The First Trust Tactical High Yield ETF's (the "Fund") investment objective is
to provide current income. The Fund's secondary investment objective is to
provide capital appreciation. Under normal market conditions, the Fund invests
at least 80% of its net assets (including investment borrowings) in high yield
debt securities that are rated below investment grade at the time of purchase or
unrated securities deemed by the Fund's advisor to be of comparable quality.
Below investment grade securities are those that, at the time of purchase, are
rated lower than "BBB-" by S&P Global Ratings, or lower than "Baa3" by Moody's
Investors Service, Inc., or comparably rated by another nationally recognized
statistical rating organization. High yield debt securities that are rated below
investment grade are commonly referred to as "junk" debt. Such securities may
include U.S. and non-U.S. corporate debt obligations, bank loans and convertible
bonds. For purposes of determining whether a security is below investment grade,
the lowest available rating will be considered. The Fund may invest in
non-income producing securities including Distressed Securities (defined below)
and common stocks. Companies whose financial condition is troubled or uncertain
and that may be involved in bankruptcy proceedings, reorganizations or financial
restructurings are referred to herein as "Distressed Securities." The Fund
invests no more than 15% of its net assets in Distressed Securities, as
determined at the time of investment. The Fund may, under normal market
conditions, invest up to 40% of its net assets (including investment borrowings)
in bank loans; however the Fund invests no more than 15% of its net assets
(including investment borrowings) in loans other than first lien senior secured
floating rate bank loans. The Fund may invest in listed and over-the-counter
derivatives to the extent permitted by the listing rules of the Nasdaq Stock
Market LLC. The Fund may not be appropriate for all investors.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended 5 Years Ended Inception (2/25/13) 5 Years Ended Inception (2/25/13)
10/31/22 10/31/22 to 10/31/22 10/31/22 to 10/31/22
FUND PERFORMANCE
NAV -11.56% 1.37% 3.26% 7.02% 36.38%
Market Price -11.90% 1.36% 3.23% 6.97% 36.07%
INDEX PERFORMANCE
ICE BofA US High Yield
Constrained Index -11.44% 1.88% 3.78% 9.76% 43.15%
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Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the periods indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the periods
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint of the national best bid and offer price ("NBBO") as of
the time that the Fund's NAV is calculated. Under SEC rules, the NBBO consists
of the highest displayed buy and lowest sell prices among the various exchanges
trading the Fund at the time the Fund's NAV is calculated. Prior to January 1,
2019, the price used was the midpoint between the highest bid and the lowest
offer on the stock exchange on which shares of the Fund were listed for trading
as of the time that the Fund's NAV was calculated. Since shares of the Fund did
not trade in the secondary market until after the Fund's inception, for the
period from inception to the first day of secondary market trading in shares of
the Fund, the NAV of the Fund is used as a proxy for the secondary market
trading price to calculate market returns. NAV and market returns assume that
all distributions have been reinvested in the Fund at NAV and Market Price,
respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of the shares of
the Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
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% OF TOTAL LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS(1)
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Software 18.1%
Media 17.4
Insurance 12.8
Health Care Providers & Services 10.6
Hotels, Restaurants & Leisure 6.0
Health Care Technology 5.0
Containers & Packaging 3.7
Diversified Telecommunication Services 3.0
Health Care Equipment & Supplies 2.1
Electric Utilities 1.9
Building Products 1.6
Trading Companies & Distributors 1.5
Communications Equipment 1.5
Commercial Services & Supplies 1.4
Internet & Direct Marketing Retail 1.1
IT Services 1.1
Diversified Consumer Services 1.0
Specialty Retail 1.0
Entertainment 1.0
Professional Services 0.7
Pharmaceuticals 0.7
Construction & Engineering 0.7
Food Products 0.6
Life Sciences Tools & Services 0.6
Independent Power and Renewable
Electricity Producers 0.6
Diversified Financial Services 0.5
Automobiles 0.5
Capital Markets 0.5
Electronic Equipment, Instruments &
Components 0.4
Aerospace & Defense 0.4
Machinery 0.3
Road & Rail 0.3
Auto Components 0.3
Consumer Finance 0.3
Construction Materials 0.2
Household Products 0.2
Chemicals 0.1
Food & Staples Retailing 0.1
Electrical Equipment 0.1
Personal Products 0.1
Semiconductors & Semiconductor
Equipment 0.0*
Real Estate Management & Development 0.0*
Wireless Telecommunication Services 0.0*
Interactive Media & Services 0.0*
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Total 100.0%
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* Amount is less than 0.1%.
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% OF TOTAL LONG-TERM
ASSET CLASSIFICATION INVESTMENTS(1)
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Corporate Bonds 74.6%
Senior Floating-Rate Loan Interests 17.6
Foreign Corporate Bonds 7.7
Common Stock 0.1
Warrants 0.0*
Rights 0.0*
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Total 100.0%
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% OF SENIOR LOANS
AND OTHER
CREDIT QUALITY (S&P RATINGS)(2) DEBT SECURITIES(1)
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BBB 0.4%
BBB- 1.4
BB+ 2.1
BB 5.3
BB- 9.7
B+ 19.7
B 19.4
B- 15.1
CCC+ 23.7
CCC 2.6
CCC- 0.1
NR 0.5
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Total 100.0%
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% OF TOTAL LONG-TERM
TOP 10 ISSUERS INVESTMENTS(1)
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Charter Communications Operating LLC 3.9%
HUB International Ltd. 3.8
Internet Brands, Inc. (WebMD/MH
Sub I LLC) 3.7
AssuredPartners, Inc. 3.5
Verscend Technologies, Inc. (Cotiviti) 3.4
Tenet Healthcare Corp. 3.1
Nexstar Broadcasting, Inc. 3.0
Cablevision (aka CSC Holdings LLC) 3.0
Amwins Group, Inc. 2.8
Gray Television, Inc. 2.5
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Total 32.7%
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(1) Percentages are based on the long positions only. Money market funds and
short positions are excluded.
(2) The ratings are by S&P Global Ratings. A credit rating is an assessment
provided by a nationally recognized statistical rating organization
(NRSRO) of the creditworthiness of an issuer with respect to debt
obligations except for those debt obligations that are only privately
rated. Ratings are measured on a scale that generally ranges from AAA
(highest) to D (lowest). Investment grade is defined as those issuers that
have a long-term credit rating of BBB- or higher. The credit ratings shown
relate to the creditworthiness of the issuers of the underlying securities
in the Fund, and not to the Fund or its shares. Credit ratings are subject
to change.
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
FEBRUARY 25, 2013 - OCTOBER 31, 2022
First Trust Tactical ICE BofA US High Yield
High Yield ETF Constrained Index
2/25/13 $10,000 $10,000
4/30/13 10,403 10,308
10/31/13 10,676 10,458
4/30/14 11,167 10,956
10/31/14 11,285 11,070
4/30/15 11,493 11,238
10/31/15 11,376 10,845
4/30/16 11,519 11,089
10/31/16 11,933 11,950
4/30/17 12,431 12,602
10/31/17 12,744 13,042
4/30/18 12,748 13,012
10/31/18 12,948 13,155
4/30/19 13,650 13,885
10/31/19 13,970 14,250
4/30/20 13,284 13,153
10/31/20 14,378 14,597
4/30/21 15,267 15,784
10/31/21 15,421 16,164
4/30/22 14,565 14,999
10/31/22 13,638 14,315
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
Information showing the number of days the market price of the Fund's shares was
greater (at a premium) and less (at a discount) than the Fund's net asset value
for the most recently completed year, and the most recently completed calendar
quarters since that year (or life of the Fund, if shorter) is available at
https://www.ftportfolios.com/Retail/etf/home.aspx.
Page 4
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PORTFOLIO COMMENTARY
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2022 (UNAUDITED)
ADVISOR
The First Trust Advisors L.P. ("First Trust") Leveraged Finance Team is
comprised of 17 experienced investment professionals specializing in below
investment grade securities. The team is comprised of portfolio management,
research, trading and operations personnel. As of October 31, 2022, the First
Trust Leveraged Finance Team managed or supervised approximately $5.8 billion in
senior secured bank loans and high-yield bonds. These assets are managed across
various strategies, including two closed-end funds, an open-end fund, four
exchange-traded funds, and a series of unit investment trusts on behalf of
retail and institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - MANAGING DIRECTOR OF FIXED INCOME AND SENIOR PORTFOLIO
MANAGER JEFFREY SCOTT, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
The portfolio managers are primarily and jointly responsible for the day-to-day
management of the Fund. Mr. Housey has served as a part of the portfolio
management team of the Fund since 2013 while Mr. Scott has served as a part of
the portfolio management team of the Fund since 2020.
COMMENTARY
The First Trust Tactical High Yield ETF (the "Fund") is an actively managed
exchange-traded fund ("ETF"). The Fund's primary investment objective is to
provide current income, with a secondary objective of capital appreciation.
MARKET RECAP
In the last 12-month ("LTM") period ended October 31, 2022, inflation remained
stubbornly elevated with the October 2022 Consumer Price Index ("CPI") printing
7.7% on a year-over-year basis; meanwhile, the Federal Reserve (the "Fed")
continues to reiterate its commitment to a 2.0% inflation target. The Fed
increased the Federal Funds target rate by 300 basis points ("bps") in the LTM
period, moving the upper bound from 0.25% to 3.25% over the course of five
meetings. In each of the last three meetings, the Fed increased the Federal
Funds target rate by a full 75 bps. Due to the persistence of the inflation data
and how far it is from the Fed's target inflation rate, we do not believe the
Fed can "pivot" to a more accommodative posture until either (1) inflation has
tamed, or (2) a recession is near or already underway, absent any major
financial market calamity. The 10-Year U.S. Treasury yield finished the period
at 4.05%, after trading from lows of 1.34% to highs of 4.24% over the LTM
period. While U.S. Equities reached all-time highs in January 2022, investor
concerns over geopolitical risks, elevated inflation, and rapidly increasing
interest rates soon dampened market euphoria and tipped U.S. Equities into a
bear market. The S&P 500(R) Index returned -14.61% during the LTM period ended
October 31, 2022.
High-Yield Bond Market
High-yield bond spreads over U.S. Treasuries increased 148 bps to T+465 bps in
the LTM period ended October 31, 2022. The current spread is 87 bps below the
long-term average spread of T+552 bps (December 1997 - October 2022). High-yield
bond funds reported their third monthly inflow of the period in October 2022,
bringing net LTM outflows to $51.8 billion.
In the LTM period, B rated bonds (-10.46%) outperformed both BB rated (-11.13%)
and CCC rated bonds (-15.89%). The average high-yield bond price decreased from
$103.67 at the beginning of the period to $85.67 at the end of the period.
Senior Loan Market
Senior loan spreads over 3-month London Interbank Offered Rate ("LIBOR")
increased by 238 bps to L+654 bps during the 12-month period ended October 31,
2022. The current spread is 139 bps above the long-term average spread of L+515
bps (December 1997 - October 2022). After experiencing six consecutive monthly
inflows, retail senior loan funds realized their sixth consecutive monthly
outflow in October 2022, bringing net inflows to $2.8 billion over the LTM
period. The market's expectation for rate hikes drove strong demand for the
senior loan asset class in the first half of the period; however, as market
volatility escalated, demand slowed.
In the LTM period, BB rated senior loans (+1.36%) outperformed both B rated
(-2.42%) and CCC rated senior loans (-10.66%). The average senior loan price
decreased from $98.55 at the beginning of the period to $92.19 at the end of the
period.
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2022 (UNAUDITED)
Default Rates
Both high-yield bond and senior loan default rates increased in the LTM period
ended October 31, 2022, as measured by the JP Morgan High-Yield Bond Universe
and the Morningstar(R)LSTA(R) US Leveraged Loan Index. The LTM default rate of
the high-yield bond market rose from 0.36% at the beginning of the period to
0.84% at the end of the period. The LTM default rate of the senior loan market
rose from 0.20% at the beginning of the period to 0.83% at the end of the
period. Both high-yield and senior loan default rates remain below their
long-term average default rates of 3.07% and 2.76%, respectively.
FUND PERFORMANCE
The Fund returned -11.56% on a net asset value basis ("NAV") and -11.90% on a
market price basis over the LTM period ended October 31, 2022. The ICE BofA US
High Yield Constrained Index ("the Index") returned -11.44% over the same
period.
The Fund held 292 individual positions diversified across 44 industries at the
end of the reporting period. By comparison, the Fund held 451 individual
positions across 49 industries at the beginning of the reporting period.
Software (18.06%), Media (17.34%), and Insurance (12.80%) comprised the Fund's
three largest industry exposures at the end of the period. The Fund's duration
was 3.60 years as of October 31, 2022.
The Fund strategically decreased leverage, selling into pockets of strength as
high-yield bond prices decreased during the LTM period. The Fund's long
positions declined from 111.53% at the beginning of the period to 103.78% at the
end of the period. The Fund's allocation to senior loans enhanced performance as
senior loans outperformed high-yield bonds throughout the period. Strong
security selection within both the Technology and Electronics industry as well
as the Media industry further drove performance.
The Fund's de minimis exposure to the Energy industry, which outperformed in the
period, proved the primary headwind to performance as crude oil prices increased
3.54% to $86.53. Energy comprised 13.16% of the benchmark and 0.05% of the Fund,
on average, over the period. The Fund's security selection within the Leisure
industry also detracted from performance as its holdings in a movie theater
operator defaulted. While movie theater attendance and film slate gradually
recovered from the disruption of the COVID-19 pandemic, the theater operator was
unable to meet deferred rent payments and subsequently chose to enter the
bankruptcy process.
The Fund's most recent monthly distribution of $0.205 per share exceeds the
monthly distribution paid in October 2021 by $0.005. The effective yield, based
on the distributions over the trailing twelve months, was 7.38% based on NAV and
7.39% based on market price.
The Fund experienced one default in a senior secured debt position in the LTM
period, compared to 9 defaults within the JP Morgan High-Yield Bond Universe
over the same period. Since inception, the Fund has experienced 10 defaults; by
comparison, the JP Morgan High-Yield Bond Universe has experienced 253 defaults
over the same period. The Fund's LTM default rate of 1.18% was modestly higher
than the JP Morgan High-Yield Bond Universe's LTM default rate of 0.84% at the
end of the period.
MARKET AND FUND OUTLOOK
Our market framework centers on our view that the Fed will stay the course,
ultimately holding rates at such a restrictive level that it tilts the economy
into recession, most likely in the second half of 2023, in our opinion. We
therefore expect market volatility to continue as investors attempt to gauge the
ultimate Federal Funds target rate as well as the likelihood, and timing of, a
recession. Consequently, we favor increasing credit quality while defensively
positioning in sectors with limited cyclicality. Depending on market
circumstances, the Fund may increase its utilization of derivatives in the
coming months, including through the use of credit default swap indices.
Further, we believe improved valuations have created attractive opportunities in
the corporate credit landscape. As we assess such market opportunities, we will
continue to employ our bottom-up credit underwriting process and rigorous
approach to risk management.
Page 6
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2022 (UNAUDITED)
As a shareholder of First Trust Tactical High Yield ETF (the "Fund"), you incur
two types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service (12b-1) fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2022.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED
EXPENSE RATIO
BEGINNING ENDING BASED ON THE EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH DURING THE
MAY 1, 2022 OCTOBER 31, 2022 PERIOD SIX-MONTH PERIOD (a)
------------------------------------------------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
Actual $1,000.00 $ 936.40 1.27% $6.20
Hypothetical (5% return before expenses) $1,000.00 $1,018.80 1.27% $6.46
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (May 1, 2022
through October 31, 2022), multiplied by 184/365 (to reflect the six-month
period).
Page 7
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES -- 77.1%
AEROSPACE & DEFENSE -- 0.5%
$ 342,000 Booz Allen Hamilton, Inc. (a)................................... 3.88% 09/01/28 $ 303,416
3,802,000 Science Applications International Corp. (a).................... 4.88% 04/01/28 3,467,580
3,412,000 TransDigm, Inc. (a)............................................. 6.25% 03/15/26 3,364,488
---------------
7,135,484
---------------
AGRICULTURAL PRODUCTS -- 0.1%
1,877,000 Lamb Weston Holdings, Inc. (a).................................. 4.88% 05/15/28 1,747,757
---------------
ALTERNATIVE CARRIERS -- 0.2%
2,000,000 Level 3 Financing, Inc. (a)..................................... 4.25% 07/01/28 1,655,460
2,000,000 Level 3 Financing, Inc. (a)..................................... 3.63% 01/15/29 1,529,890
---------------
3,185,350
---------------
APPAREL RETAIL -- 0.6%
8,080,000 Nordstrom, Inc. (b)............................................. 4.00% 03/15/27 6,889,025
2,854,000 Nordstrom, Inc.................................................. 4.38% 04/01/30 2,194,969
---------------
9,083,994
---------------
APPLICATION SOFTWARE -- 1.8%
12,000,000 Condor Merger Sub, Inc. (a)..................................... 7.38% 02/15/30 9,944,764
5,500,000 Go Daddy Operating Co. LLC / GD Finance Co., Inc. (a) (b)....... 5.25% 12/01/27 5,160,120
987,000 Go Daddy Operating Co. LLC / GD Finance Co., Inc. (a)........... 3.50% 03/01/29 821,110
13,254,000 GoTo Group, Inc. (a) (b)........................................ 5.50% 09/01/27 7,720,720
5,685,000 Open Text Holdings, Inc. (a).................................... 4.13% 02/15/30 4,568,438
---------------
28,215,152
---------------
AUTOMOBILE MANUFACTURERS -- 0.5%
6,631,000 Ford Motor Co. (b).............................................. 9.63% 04/22/30 7,420,263
500,000 Ford Motor Credit Co. LLC....................................... 5.13% 06/16/25 484,595
667,000 Penske Automotive Group, Inc.................................... 3.50% 09/01/25 620,938
---------------
8,525,796
---------------
AUTOMOTIVE RETAIL -- 0.3%
167,000 Group 1 Automotive, Inc. (a).................................... 4.00% 08/15/28 137,679
5,339,000 IAA, Inc. (a)................................................... 5.50% 06/15/27 5,003,029
250,000 Lithia Motors, Inc. (a)......................................... 3.88% 06/01/29 202,119
100,000 Sonic Automotive, Inc. (a)...................................... 4.63% 11/15/29 78,583
100,000 Sonic Automotive, Inc. (a)...................................... 4.88% 11/15/31 76,197
---------------
5,497,607
---------------
BROADCASTING -- 10.8%
21,673,000 Diamond Sports Group LLC / Diamond Sports Finance
Co. (a) (b).................................................. 6.63% 08/15/27 1,137,832
28,294,000 Gray Television, Inc. (a) (b)................................... 5.88% 07/15/26 26,735,708
12,429,000 Gray Television, Inc. (a) (b)................................... 7.00% 05/15/27 11,952,472
3,591,000 Gray Television, Inc. (a)....................................... 4.75% 10/15/30 2,845,419
30,936,000 iHeartCommunications, Inc. (b).................................. 8.38% 05/01/27 27,842,941
5,787,000 iHeartCommunications, Inc. (a) (b).............................. 5.25% 08/15/27 5,282,374
40,562,000 Nexstar Media, Inc. (a) (b)..................................... 5.63% 07/15/27 38,596,163
13,255,000 Nexstar Media, Inc. (a) (b)..................................... 4.75% 11/01/28 11,663,605
1,389,000 Scripps Escrow II, Inc. (a)..................................... 3.88% 01/15/29 1,149,154
8,355,000 Scripps Escrow, Inc. (a) (b).................................... 5.88% 07/15/27 7,580,492
15,319,000 Sinclair Television Group, Inc. (a) (b)......................... 5.13% 02/15/27 12,895,228
5,000,000 Sinclair Television Group, Inc. (a)............................. 5.50% 03/01/30 3,747,491
1,000,000 Sinclair Television Group, Inc. (a)............................. 4.13% 12/01/30 772,080
5,509,000 Sirius XM Radio, Inc. (a)....................................... 3.13% 09/01/26 4,934,659
Page 8 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
BROADCASTING (CONTINUED)
$ 857,000 Sirius XM Radio, Inc. (a)....................................... 5.50% 07/01/29 $ 785,933
2,000,000 Sirius XM Radio, Inc. (a)....................................... 4.13% 07/01/30 1,633,830
9,107,000 Univision Communications, Inc. (a) (b).......................... 5.13% 02/15/25 8,814,756
4,768,000 Univision Communications, Inc. (a) (b).......................... 6.63% 06/01/27 4,718,127
---------------
173,088,264
---------------
BUILDING PRODUCTS -- 0.5%
1,000,000 American Builders & Contractors Supply Co., Inc. (a)............ 4.00% 01/15/28 884,345
500,000 American Builders & Contractors Supply Co., Inc. (a)............ 3.88% 11/15/29 411,330
100,000 Beacon Roofing Supply, Inc. (a)................................. 4.13% 05/15/29 82,874
100,000 Builders FirstSource, Inc. (a).................................. 4.25% 02/01/32 80,189
1,392,000 Standard Industries, Inc. (a)................................... 5.00% 02/15/27 1,262,829
1,426,000 Standard Industries, Inc. (a)................................... 4.75% 01/15/28 1,253,055
2,492,000 Standard Industries, Inc. (a)................................... 4.38% 07/15/30 2,029,385
1,000,000 Standard Industries, Inc. (a)................................... 3.38% 01/15/31 750,590
1,000,000 TopBuild Corp. (a).............................................. 3.63% 03/15/29 796,044
---------------
7,550,641
---------------
CABLE & SATELLITE -- 7.5%
1,000,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.50% 05/01/26 963,865
2,828,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.13% 05/01/27 2,624,257
9,738,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.00% 02/01/28 8,854,179
23,466,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.38% 06/01/29 20,964,055
20,653,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 4.75% 03/01/30 17,393,234
9,707,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 4.50% 08/15/30 7,960,711
5,445,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 4.25% 02/01/31 4,324,174
1,000,000 CCO Holdings LLC / CCO Holdings Capital Corp.................... 4.50% 05/01/32 786,956
819,000 CSC Holdings LLC (a)............................................ 5.50% 04/15/27 769,774
13,619,000 CSC Holdings LLC (a)............................................ 7.50% 04/01/28 11,824,492
42,608,000 CSC Holdings LLC (a) (b)........................................ 5.75% 01/15/30 33,035,474
4,167,000 CSC Holdings LLC (a)............................................ 4.63% 12/01/30 3,007,188
1,000,000 CSC Holdings LLC (a)............................................ 5.00% 11/15/31 716,665
357,000 DIRECTV Financing LLC / DIRECTV Financing Co.,
Inc. (a)..................................................... 5.88% 08/15/27 322,185
2,851,000 Radiate Holdco LLC / Radiate Finance, Inc. (a).................. 4.50% 09/15/26 2,414,854
6,216,000 Radiate Holdco LLC / Radiate Finance, Inc. (a).................. 6.50% 09/15/28 3,931,154
---------------
119,893,217
---------------
CASINOS & GAMING -- 3.5%
500,000 Boyd Gaming Corp................................................ 4.75% 12/01/27 461,920
6,062,000 Boyd Gaming Corp. (a)........................................... 4.75% 06/15/31 5,141,061
6,926,000 Caesars Entertainment, Inc. (a) (b)............................. 8.13% 07/01/27 6,747,690
8,662,000 Caesars Entertainment, Inc. (a)................................. 4.63% 10/15/29 6,927,853
179,000 CDI Escrow Issuer, Inc. (a)..................................... 5.75% 04/01/30 161,816
29,783,000 Fertitta Entertainment LLC / Fertitta Entertainment Finance Co.,
Inc. (a)..................................................... 6.75% 01/15/30 23,444,135
430,000 MGM Resorts International....................................... 6.75% 05/01/25 426,201
2,440,000 MGM Resorts International....................................... 5.75% 06/15/25 2,379,964
716,000 Scientific Games Holdings LP/Scientific Games US FinCo,
Inc. (a)..................................................... 6.63% 03/01/30 617,202
3,903,000 Station Casinos LLC (a)......................................... 4.50% 02/15/28 3,337,863
5,952,000 VICI Properties L.P. / VICI Note Co., Inc. (a).................. 4.25% 12/01/26 5,370,700
140,000 VICI Properties L.P. / VICI Note Co., Inc. (a).................. 3.75% 02/15/27 122,976
100,000 VICI Properties L.P. / VICI Note Co., Inc. (a).................. 3.88% 02/15/29 84,479
---------------
55,223,860
---------------
See Notes to Financial Statements Page 9
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
COMMUNICATIONS EQUIPMENT -- 1.5%
$ 26,334,000 CommScope Technologies LLC (a) (b).............................. 6.00% 06/15/25 $ 24,618,603
---------------
CONSTRUCTION & ENGINEERING -- 0.8%
500,000 Atkore, Inc. (a)................................................ 4.25% 06/01/31 407,035
13,490,000 Pike Corp. (a) (b).............................................. 5.50% 09/01/28 11,550,880
---------------
11,957,915
---------------
CONSTRUCTION MATERIALS -- 0.2%
176,000 GYP Holdings III Corp. (a)...................................... 4.63% 05/01/29 139,242
3,623,000 Summit Materials LLC / Summit Materials Finance Corp. (a)....... 5.25% 01/15/29 3,317,508
---------------
3,456,750
---------------
CONSUMER FINANCE -- 0.3%
1,889,000 Black Knight InfoServ LLC (a)................................... 3.63% 09/01/28 1,641,069
3,000,000 FirstCash, Inc. (a)............................................. 4.63% 09/01/28 2,606,535
---------------
4,247,604
---------------
DATA PROCESSING & OUTSOURCED SERVICES -- 0.0%
500,000 Block, Inc...................................................... 2.75% 06/01/26 448,365
250,000 Block, Inc...................................................... 3.50% 06/01/31 201,897
---------------
650,262
---------------
ELECTRIC UTILITIES -- 1.9%
19,077,000 PG&E Corp. (b).................................................. 5.00% 07/01/28 17,407,858
1,348,000 PG&E Corp....................................................... 5.25% 07/01/30 1,197,570
5,000,000 Vistra Operations Co. LLC (a)................................... 5.63% 02/15/27 4,774,050
3,189,000 Vistra Operations Co. LLC (a)................................... 5.00% 07/31/27 2,947,417
5,000,000 Vistra Operations Co. LLC (a)................................... 4.38% 05/01/29 4,288,550
---------------
30,615,445
---------------
ELECTRICAL COMPONENTS & EQUIPMENT -- 0.0%
667,000 Sensata Technologies, Inc. (a).................................. 3.75% 02/15/31 532,700
---------------
ENVIRONMENTAL & FACILITIES SERVICES -- 0.6%
4,595,000 Allied Universal Holdco LLC / Allied Universal Finance
Corp. (a).................................................... 9.75% 07/15/27 3,970,023
7,938,000 Allied Universal Holdco LLC / Allied Universal Finance
Corp. (a) (b)................................................ 6.00% 06/01/29 5,529,861
---------------
9,499,884
---------------
FERTILIZERS & AGRICULTURAL CHEMICALS -- 0.1%
250,000 Scotts Miracle-Gro (The) Co..................................... 4.50% 10/15/29 203,000
1,000,000 Scotts Miracle-Gro (The) Co..................................... 4.00% 04/01/31 767,500
---------------
970,500
---------------
FINANCIAL EXCHANGES & DATA -- 0.0%
750,000 MSCI, Inc. (a).................................................. 4.00% 11/15/29 652,500
---------------
FOOD DISTRIBUTORS -- 0.1%
1,397,000 US Foods, Inc. (a).............................................. 4.75% 02/15/29 1,240,562
---------------
HEALTH CARE EQUIPMENT -- 0.3%
3,471,000 Baxter International, Inc....................................... 1.32% 11/29/24 3,194,844
1,435,000 Embecta Corp. (a)............................................... 5.00% 02/15/30 1,232,134
300,000 Teleflex, Inc. (a).............................................. 4.25% 06/01/28 273,235
---------------
4,700,213
---------------
Page 10 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
HEALTH CARE FACILITIES -- 6.1%
$ 1,000,000 Acadia Healthcare Co., Inc. (a)................................. 5.50% 07/01/28 $ 929,140
1,290,000 Acadia Healthcare Co., Inc. (a)................................. 5.00% 04/15/29 1,156,457
3,652,000 CHS/Community Health Systems, Inc. (a).......................... 5.25% 05/15/30 2,536,113
2,284,000 Encompass Health Corp........................................... 5.75% 09/15/25 2,264,989
1,300,000 Encompass Health Corp........................................... 4.50% 02/01/28 1,166,620
6,080,000 Encompass Health Corp........................................... 4.75% 02/01/30 5,170,371
500,000 Encompass Health Corp........................................... 4.63% 04/01/31 418,005
3,840,000 HCA, Inc........................................................ 5.88% 02/15/26 3,805,287
1,324,000 HCA, Inc........................................................ 5.38% 09/01/26 1,288,524
3,000,000 HCA, Inc........................................................ 3.50% 09/01/30 2,494,905
26,514,000 Select Medical Corp. (a) (b).................................... 6.25% 08/15/26 25,191,084
10,005,000 Tenet Healthcare Corp. (a)...................................... 4.88% 01/01/26 9,448,822
9,689,000 Tenet Healthcare Corp. (a) (b).................................. 5.13% 11/01/27 8,948,082
4,850,000 Tenet Healthcare Corp. (a)...................................... 4.63% 06/15/28 4,276,601
33,352,000 Tenet Healthcare Corp. (a) (b).................................. 6.13% 10/01/28 28,987,057
---------------
98,082,057
---------------
HEALTH CARE SERVICES -- 2.9%
24,415,000 DaVita, Inc. (a) (b)............................................ 4.63% 06/01/30 19,074,707
908,000 DaVita, Inc. (a)................................................ 3.75% 02/15/31 661,687
25,976,000 Global Medical Response, Inc. (a) (b)........................... 6.50% 10/01/25 20,709,756
718,000 ModivCare Escrow Issuer, Inc. (a)............................... 5.00% 10/01/29 612,027
5,022,000 Pediatrix Medical Group, Inc. (a)............................... 5.38% 02/15/30 4,326,076
100,000 Service Corp. International..................................... 3.38% 08/15/30 80,968
---------------
45,465,221
---------------
HEALTH CARE SUPPLIES -- 1.9%
200,000 180 Medical, Inc. (a)........................................... 3.88% 10/15/29 169,292
25,872,000 Medline Borrower L.P. (a)....................................... 3.88% 04/01/29 21,257,729
10,908,000 Medline Borrower L.P. (a) (b)................................... 5.25% 10/01/29 8,513,585
770,000 Owens & Minor, Inc. (a)......................................... 4.50% 03/31/29 597,668
---------------
30,538,274
---------------
HEALTH CARE TECHNOLOGY -- 2.8%
15,722,000 AthenaHealth Group, Inc. (a).................................... 6.50% 02/15/30 12,271,335
4,503,000 HealthEquity, Inc. (a).......................................... 4.50% 10/01/29 3,968,269
27,758,000 Verscend Escrow Corp. (a) (b)................................... 9.75% 08/15/26 27,873,196
---------------
44,112,800
---------------
HOTELS, RESORTS & CRUISE LINES -- 0.3%
706,000 Boyne USA, Inc. (a)............................................. 4.75% 05/15/29 619,314
4,898,000 Midwest Gaming Borrower LLC / Midwest Gaming Finance
Corp. (a).................................................... 4.88% 05/01/29 4,157,281
711,000 Wyndham Hotels & Resorts, Inc. (a).............................. 4.38% 08/15/28 630,444
125,000 XHR L.P. (a).................................................... 4.88% 06/01/29 108,045
---------------
5,515,084
---------------
HOUSEHOLD PRODUCTS -- 0.2%
200,000 Central Garden & Pet Co......................................... 4.13% 10/15/30 165,595
2,154,000 Energizer Holdings, Inc. (a).................................... 6.50% 12/31/27 1,973,549
1,350,000 Energizer Holdings, Inc. (a).................................... 4.38% 03/31/29 1,090,125
---------------
3,229,269
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS -- 0.6%
10,427,000 Calpine Corp. (a) (b)........................................... 5.13% 03/15/28 9,265,092
---------------
See Notes to Financial Statements Page 11
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
INDUSTRIAL MACHINERY -- 0.4%
$ 5,573,000 Gates Global LLC / Gates Corp. (a).............................. 6.25% 01/15/26 $ 5,362,591
250,000 Roller Bearing Co. of America, Inc. (a)......................... 4.38% 10/15/29 219,683
---------------
5,582,274
---------------
INSURANCE BROKERS -- 13.0%
38,556,000 Alliant Holdings Intermediate LLC / Alliant Holdings
Co-Issuer (a) (b)............................................ 6.75% 10/15/27 35,224,569
1,790,000 Alliant Holdings Intermediate LLC / Alliant Holdings
Co-Issuer (a)................................................ 5.88% 11/01/29 1,513,736
54,652,000 AmWINS Group, Inc. (a) (b)...................................... 4.88% 06/30/29 46,884,056
25,001,000 AssuredPartners, Inc. (a) (b)................................... 7.00% 08/15/25 23,987,976
36,774,000 AssuredPartners, Inc. (a) (b)................................... 5.63% 01/15/29 30,277,137
8,120,000 BroadStreet Partners, Inc. (a) (b).............................. 5.88% 04/15/29 6,542,969
3,761,000 GTCR AP Finance, Inc. (a)....................................... 8.00% 05/15/27 3,586,919
46,507,000 HUB International Ltd. (a) (b).................................. 7.00% 05/01/26 46,011,468
14,730,000 HUB International Ltd. (a)...................................... 5.63% 12/01/29 12,649,314
535,000 USI, Inc. (a)................................................... 6.88% 05/01/25 520,065
---------------
207,198,209
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 1.2%
500,000 Ciena Corp. (a)................................................. 4.00% 01/31/30 420,807
1,910,000 Zayo Group Holdings, Inc. (a)................................... 4.00% 03/01/27 1,459,007
25,891,000 Zayo Group Holdings, Inc. (a) (b)............................... 6.13% 03/01/28 17,269,297
---------------
19,149,111
---------------
INTERACTIVE HOME ENTERTAINMENT -- 0.2%
4,601,000 Playtika Holding Corp. (a)...................................... 4.25% 03/15/29 3,841,698
---------------
INTERACTIVE MEDIA & SERVICES -- 0.0%
500,000 Match Group Holdings II LLC (a)................................. 4.63% 06/01/28 446,125
---------------
INTERNET & DIRECT MARKETING RETAIL -- 1.1%
20,909,000 Cars.com, Inc. (a) (b).......................................... 6.38% 11/01/28 18,148,176
---------------
INVESTMENT BANKING & BROKERAGE -- 0.1%
1,455,000 LPL Holdings, Inc. (a).......................................... 4.63% 11/15/27 1,342,203
---------------
IT CONSULTING & OTHER SERVICES -- 0.0%
250,000 Gartner, Inc. (a)............................................... 4.50% 07/01/28 232,186
250,000 Gartner, Inc. (a)............................................... 3.75% 10/01/30 210,737
---------------
442,923
---------------
LEISURE FACILITIES -- 0.1%
250,000 Cedar Fair L.P.................................................. 5.25% 07/15/29 220,314
850,000 Cedar Fair L.P. / Canada's Wonderland Co. / Magnum
Management Corp. / Millennium Op............................. 5.38% 04/15/27 802,413
717,000 SeaWorld Parks & Entertainment, Inc. (a)........................ 5.25% 08/15/29 617,712
---------------
1,640,439
---------------
MANAGED HEALTH CARE -- 1.5%
7,782,000 Centene Corp.................................................... 4.25% 12/15/27 7,200,451
1,000,000 Molina Healthcare, Inc. (a)..................................... 4.38% 06/15/28 898,430
100,000 Molina Healthcare, Inc. (a)..................................... 3.88% 11/15/30 85,241
6,523,000 MPH Acquisition Holdings LLC (a) (b)............................ 5.50% 09/01/28 5,648,967
12,124,000 MPH Acquisition Holdings LLC (a) (b)............................ 5.75% 11/01/28 9,399,814
---------------
23,232,903
---------------
Page 12 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
METAL & GLASS CONTAINERS -- 1.3%
$ 10,648,000 Ball Corp....................................................... 2.88% 08/15/30 $ 8,287,338
3,864,000 Berry Global, Inc. (a).......................................... 4.50% 02/15/26 3,599,219
981,000 Berry Global, Inc. (a).......................................... 5.63% 07/15/27 931,803
175,000 Crown Americas LLC (a).......................................... 5.25% 04/01/30 160,350
6,050,000 Owens-Brockway Glass Container, Inc. (a) (b).................... 6.38% 08/15/25 5,670,363
2,200,000 Silgan Holdings, Inc............................................ 4.13% 02/01/28 2,018,742
---------------
20,667,815
---------------
MOVIES & ENTERTAINMENT -- 0.7%
5,494,000 Live Nation Entertainment, Inc. (a)............................. 5.63% 03/15/26 5,254,242
523,000 Live Nation Entertainment, Inc. (a)............................. 6.50% 05/15/27 522,876
5,895,000 Live Nation Entertainment, Inc. (a)............................. 4.75% 10/15/27 5,253,683
1,000,000 WMG Acquisition Corp. (a)....................................... 3.00% 02/15/31 782,410
---------------
11,813,211
---------------
PACKAGED FOODS & MEATS -- 0.6%
2,190,000 B&G Foods, Inc.................................................. 5.25% 04/01/25 1,995,758
750,000 Performance Food Group, Inc. (a)................................ 5.50% 10/15/27 710,891
2,116,000 Post Holdings, Inc. (a)......................................... 5.75% 03/01/27 2,050,764
4,434,000 Post Holdings, Inc. (a)......................................... 5.63% 01/15/28 4,151,111
---------------
8,908,524
---------------
PAPER PACKAGING -- 2.5%
30,696,000 Graham Packaging Co., Inc. (a) (b).............................. 7.13% 08/15/28 25,207,485
2,000,000 Graphic Packaging International LLC (a)......................... 3.50% 03/15/28 1,732,298
1,000,000 Graphic Packaging International LLC (a)......................... 3.50% 03/01/29 846,184
11,095,000 Pactiv Evergreen Group Issuer, Inc. / Pactiv Evergreen Group
Issuer LLC (a)............................................... 4.00% 10/15/27 9,931,134
420,000 Pactiv LLC...................................................... 7.95% 12/15/25 391,663
376,000 Sealed Air Corp. (a)............................................ 5.50% 09/15/25 368,969
1,434,000 Sealed Air Corp. (a)............................................ 5.00% 04/15/29 1,310,067
---------------
39,787,800
---------------
PERSONAL PRODUCTS -- 0.1%
250,000 Prestige Brands, Inc. (a)....................................... 5.13% 01/15/28 232,726
750,000 Prestige Brands, Inc. (a)....................................... 3.75% 04/01/31 603,131
---------------
835,857
---------------
PHARMACEUTICALS -- 0.6%
500,000 Catalent Pharma Solutions, Inc. (a)............................. 5.00% 07/15/27 470,270
250,000 Catalent Pharma Solutions, Inc. (a)............................. 3.13% 02/15/29 204,942
950,000 Charles River Laboratories International, Inc. (a).............. 4.25% 05/01/28 865,497
1,000,000 Charles River Laboratories International, Inc. (a).............. 3.75% 03/15/29 862,410
1,000,000 Charles River Laboratories International, Inc. (a).............. 4.00% 03/15/31 842,538
1,333,000 Emergent BioSolutions, Inc. (a)................................. 3.88% 08/15/28 800,285
4,343,000 Horizon Therapeutics USA, Inc. (a) (b).......................... 5.50% 08/01/27 4,190,713
800,000 IQVIA, Inc. (a)................................................. 5.00% 10/15/26 764,664
1,278,000 IQVIA, Inc. (a)................................................. 5.00% 05/15/27 1,219,538
---------------
10,220,857
---------------
REAL ESTATE SERVICES -- 0.0%
290,000 Tri Pointe Homes, Inc........................................... 5.25% 06/01/27 250,039
500,000 Tri Pointe Homes, Inc........................................... 5.70% 06/15/28 428,310
---------------
678,349
---------------
See Notes to Financial Statements Page 13
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
RESEARCH & CONSULTING SERVICES -- 0.5%
$ 325,000 Clarivate Science Holdings Corp. (a)............................ 4.88% 07/01/29 $ 272,018
12,324,000 CoreLogic, Inc. (a) (b)......................................... 4.50% 05/01/28 8,314,849
---------------
8,586,867
---------------
RESTAURANTS -- 0.6%
661,000 Brinker International, Inc. (a)................................. 5.00% 10/01/24 642,101
9,310,000 IRB Holding Corp. (a) (b)....................................... 7.00% 06/15/25 9,315,493
---------------
9,957,594
---------------
SECURITY & ALARM SERVICES -- 0.2%
1,200,000 Brink's (The) Co. (a)........................................... 5.50% 07/15/25 1,166,574
2,061,000 Brink's (The) Co. (a)........................................... 4.63% 10/15/27 1,909,815
---------------
3,076,389
---------------
SEMICONDUCTORS -- 0.1%
1,000,000 Qorvo, Inc. (a)................................................. 3.38% 04/01/31 754,690
---------------
SPECIALIZED CONSUMER SERVICES -- 0.3%
4,000,000 Aramark Services, Inc. (a)...................................... 6.38% 05/01/25 3,967,560
1,055,000 Aramark Services, Inc. (a)...................................... 5.00% 02/01/28 965,214
775,000 Carriage Services, Inc. (a)..................................... 4.25% 05/15/29 597,556
---------------
5,530,330
---------------
SPECIALIZED FINANCE -- 0.1%
1,776,000 Park Intermediate Holdings LLC / PK Domestic Property LLC /
PK Finance Co-Issuer (a)..................................... 4.88% 05/15/29 1,519,190
---------------
SPECIALTY CHEMICALS -- 0.5%
8,157,000 Avantor Funding, Inc. (a)....................................... 4.63% 07/15/28 7,386,857
500,000 Axalta Coating Systems LLC (a).................................. 3.38% 02/15/29 414,320
250,000 HB Fuller Co.................................................... 4.25% 10/15/28 216,610
---------------
8,017,787
---------------
SPECIALTY STORES -- 0.0%
350,000 PetSmart, Inc. / PetSmart Finance Corp. (a)..................... 4.75% 02/15/28 320,253
---------------
SYSTEMS SOFTWARE -- 3.5%
8,407,000 Boxer Parent Co., Inc. (a) (b).................................. 9.13% 03/01/26 8,042,216
2,500,000 Crowdstrike Holdings, Inc....................................... 3.00% 02/15/29 2,113,470
4,204,000 Oracle Corp..................................................... 6.50% 04/15/38 4,044,730
250,000 PTC, Inc. (a)................................................... 3.63% 02/15/25 237,368
41,967,000 SS&C Technologies, Inc. (a) (b)................................. 5.50% 09/30/27 39,145,380
1,600,000 VMware, Inc..................................................... 1.00% 08/15/24 1,475,516
---------------
55,058,680
---------------
TECHNOLOGY DISTRIBUTORS -- 0.0%
750,000 CDW LLC / CDW Finance Corp...................................... 3.25% 02/15/29 614,865
---------------
TRADING COMPANIES & DISTRIBUTORS -- 0.7%
2,715,000 SRS Distribution, Inc. (a)...................................... 6.13% 07/01/29 2,213,027
9,816,000 SRS Distribution, Inc. (a) (b).................................. 6.00% 12/01/29 8,026,592
127,000 United Rentals North America, Inc............................... 5.50% 05/15/27 123,037
---------------
10,362,656
---------------
TRUCKING -- 0.3%
6,481,000 Hertz (The) Corp. (a)........................................... 4.63% 12/01/26 5,534,709
---------------
Page 14 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS AND NOTES (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES -- 0.0%
$ 500,000 SBA Communications Corp......................................... 3.88% 02/15/27 $ 452,187
---------------
TOTAL CORPORATE BONDS AND NOTES.............................................................. 1,232,220,528
(Cost $1,412,569,000) ---------------
FOREIGN CORPORATE BONDS AND NOTES -- 8.0%
APPLICATION SOFTWARE -- 1.1%
4,318,000 ION Trading Technologies S.A.R.L. (a)........................... 5.75% 05/15/28 3,439,115
11,860,000 Open Text Corp. (a)............................................. 3.88% 02/15/28 10,175,524
4,892,000 Open Text Corp. (a)............................................. 3.88% 12/01/29 3,906,482
---------------
17,521,121
---------------
AUTO PARTS & EQUIPMENT -- 0.3%
4,432,000 Clarios Global L.P. / Clarios US Finance Co. (a)................ 8.50% 05/15/27 4,371,126
---------------
BUILDING PRODUCTS -- 1.2%
15,022,000 Cemex SAB de C.V. (a) (b)....................................... 7.38% 06/05/27 14,907,082
1,304,000 Cemex SAB de C.V. (a)........................................... 5.45% 11/19/29 1,140,494
2,000,000 Cemex SAB de C.V. (a)........................................... 5.20% 09/17/30 1,704,730
1,000,000 Masonite International Corp. (a)................................ 5.38% 02/01/28 916,890
---------------
18,669,196
---------------
CABLE & SATELLITE -- 0.0%
250,000 Virgin Media Finance PLC (a).................................... 5.00% 07/15/30 200,813
---------------
CASINOS & GAMING -- 0.0%
500,000 International Game Technology PLC (a)........................... 5.25% 01/15/29 460,037
---------------
DATA PROCESSING & OUTSOURCED SERVICES -- 0.7%
15,159,000 Paysafe Finance PLC / Paysafe Holdings US Corp. (a) (b)......... 4.00% 06/15/29 10,860,741
---------------
ELECTRICAL COMPONENTS & EQUIPMENT -- 0.0%
500,000 Sensata Technologies B.V. (a)................................... 4.00% 04/15/29 421,903
---------------
ENVIRONMENTAL & FACILITIES SERVICES -- 0.7%
500,000 GFL Environmental, Inc. (a)..................................... 5.13% 12/15/26 476,720
9,173,000 GFL Environmental, Inc. (a) (b)................................. 4.00% 08/01/28 7,959,137
1,784,000 GFL Environmental, Inc. (a)..................................... 4.75% 06/15/29 1,558,926
1,000,000 GFL Environmental, Inc. (a)..................................... 4.38% 08/15/29 848,485
---------------
10,843,268
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 1.0%
2,989,000 Altice France S.A. (a).......................................... 5.50% 01/15/28 2,404,232
500,000 Altice France S.A. (a).......................................... 5.13% 07/15/29 377,500
17,387,000 Altice France S.A. (a) (b)...................................... 5.50% 10/15/29 13,291,058
---------------
16,072,790
---------------
LIFE SCIENCES TOOLS & SERVICES -- 0.1%
2,604,000 Grifols Escrow Issuer S.A. (a).................................. 4.75% 10/15/28 2,037,825
---------------
METAL & GLASS CONTAINERS -- 0.1%
200,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (a)..................................................... 4.13% 08/15/26 173,411
1,403,000 Trivium Packaging Finance B.V. (a).............................. 5.50% 08/15/26 1,291,167
---------------
1,464,578
---------------
PHARMACEUTICALS -- 0.0%
286,000 Jazz Securities DAC (a)......................................... 4.38% 01/15/29 254,546
---------------
See Notes to Financial Statements Page 15
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
FOREIGN CORPORATE BONDS AND NOTES (CONTINUED)
RESEARCH & CONSULTING SERVICES -- 0.2%
$ 3,774,000 Camelot Finance S.A. (a)........................................ 4.50% 11/01/26 $ 3,535,686
---------------
RESTAURANTS -- 1.6%
2,674,000 1011778 BC ULC / New Red Finance, Inc. (a)...................... 4.38% 01/15/28 2,362,559
27,458,000 1011778 BC ULC / New Red Finance, Inc. (a)...................... 4.00% 10/15/30 22,284,913
---------------
24,647,472
---------------
SPECIALIZED FINANCE -- 0.0%
710,000 Ardagh Metal Packaging Finance USA LLC / Ardagh Metal
Packaging Finance PLC (a).................................... 6.00% 06/15/27 682,388
---------------
SPECIALTY CHEMICALS -- 0.1%
1,000,000 Axalta Coating Systems LLC / Axalta Coating Systems Dutch
Holding B B.V. (a)........................................... 4.75% 06/15/27 913,829
---------------
TRADING COMPANIES & DISTRIBUTORS -- 0.9%
6,779,000 VistaJet Malta Finance PLC / XO Management Holding,
Inc. (a)..................................................... 7.88% 05/01/27 6,149,977
9,742,000 VistaJet Malta Finance PLC / XO Management Holding,
Inc. (a)..................................................... 6.38% 02/01/30 8,128,822
---------------
14,278,799
---------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES...................................................... 127,236,118
(Cost $143,703,259) ---------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (c) MATURITY (d) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS -- 18.2%
APPLICATION SOFTWARE -- 11.8%
3,000,000 Epicor Software Corp., Term Loan (Second Lien), 1 Mo. LIBOR
+ 7.75%, 1.00% Floor......................................... 11.50% 07/30/28 2,933,430
21,340,414 Gainwell Acquisition Corp. (fka Milano), Term Loan B, 3 Mo.
LIBOR + 4.00%, 0.75% Floor................................... 7.67% 10/01/27 20,237,755
23,370,911 Greeneden U.S. Holdings II LLC (Genesys Telecommunications
Laboratories, Inc.), Initial Dollar Term Loan, 1 Mo. LIBOR +
4.00%, 0.75% Floor........................................... 7.75% 12/01/27 22,742,935
15,752,668 Hyland Software, Inc., Term Loan (Second Lien), 1 Mo. LIBOR
+ 6.25%, 0.75% Floor......................................... 10.00% 07/10/25 15,073,413
14,748,363 Hyland Software, Inc., Term Loan B, 1 Mo. LIBOR + 3.50%,
0.75% Floor.................................................. 7.25% 07/01/24 14,367,412
21,085,227 Internet Brands, Inc. (WebMD/MH Sub I LLC), 2020 June New
Term Loan, 1 Mo. LIBOR + 3.75%, 1.00% Floor.................. 7.50% 09/15/24 20,272,602
24,168,650 Internet Brands, Inc. (WebMD/MH Sub I LLC), Initial Term
Loan, 1 Mo. LIBOR + 3.75%, 0.00% Floor....................... 7.50% 09/13/24 23,232,115
19,021,355 Internet Brands, Inc. (WebMD/MH Sub I LLC), Term Loan
(Second Lien), 1 Mo. SOFR + 6.25%, 0.00% Floor............... 9.98% 02/23/29 17,380,763
1,048,645 ION Trading Technologies Ltd., Term Loan B, 3 Mo. LIBOR +
4.75%, 0.00% Floor........................................... 8.42% 04/01/28 972,839
14,947,479 LogMeIn, Inc. (GoTo Group, Inc.), Term Loan B, 1 Mo. LIBOR
+ 4.75%, 0.00% Floor......................................... 8.32% 08/31/27 9,391,949
8,944,728 RealPage, Inc., Term Loan (Second Lien), 1 Mo. LIBOR +
6.50%, 0.75% Floor........................................... 10.25% 04/22/29 8,586,939
33,933,813 SolarWinds Holdings, Inc., Initial Term Loan, 1 Mo. LIBOR +
2.75%, 0.00% Floor........................................... 6.50% 02/05/24 33,563,625
---------------
188,755,777
---------------
Page 16 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED
VALUE DESCRIPTION RATE (c) MATURITY (d) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ASSET MANAGEMENT & CUSTODY BANKS -- 0.4%
$ 7,000,000 Edelman Financial Engines Center LLC, Term Loan (Second
Lien), 1 Mo. LIBOR + 6.75%, 0.00% Floor...................... 10.50% 07/20/26 $ 6,308,750
---------------
EDUCATION SERVICES -- 0.0%
357,709 Ascensus Holdings, Inc. (Mercury), Term Loan (Second Lien),
3 Mo. LIBOR + 6.50%, 0.50% Floor............................. 10.25% 08/02/29 316,572
---------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 0.4%
7,457,910 Verifone Systems, Inc., Term Loan B, 3 Mo. LIBOR + 4.00%,
0.00% Floor.................................................. 7.00% 08/20/25 6,617,030
---------------
HEALTH CARE FACILITIES -- 0.1%
1,366,000 Select Medical Corp., Term Loan B, 1 Mo. LIBOR + 2.50%,
0.00% Floor.................................................. 6.26% 03/06/25 1,326,304
---------------
HEALTH CARE SERVICES -- 0.4%
1,033,511 SCP Health (Onex TSG Intermediate Corp.), Term Loan B, 3 Mo.
LIBOR + 4.75%, 0.75% Floor................................... 9.16% 02/28/28 917,241
3,401,788 Sevita (National Mentor Holdings, Inc.), Term Loan B, 1 Mo.
LIBOR + 3.75%, 0.75% Floor................................... 7.51% 03/01/28 2,412,174
4,203,145 Sevita (National Mentor Holdings, Inc.), Term Loan B, 3 Mo.
LIBOR + 3.75%, 0.75% Floor................................... 7.43% 03/01/28 2,980,408
232,765 Sevita (National Mentor Holdings, Inc.), Term Loan C, 3 Mo.
LIBOR + 3.75%, 0.75% Floor................................... 7.43% 03/01/28 165,051
---------------
6,474,874
---------------
HEALTH CARE TECHNOLOGY -- 2.4%
8,061,732 Ciox Health (Healthport/CT Technologies Intermediate Holdings,
Inc.), New Term Loan B, 1 Mo. LIBOR + 4.25%, 0.75%
Floor........................................................ 8.00% 12/16/25 7,376,485
2,249,672 Navicure, Inc. (Waystar Technologies, Inc.), Term Loan B, 1 Mo.
LIBOR + 4.00%, 0.00% Floor................................... 7.75% 10/23/26 2,183,600
1,333,209 Press Ganey (Azalea TopCo, Inc.), 2021 Term Loan, 1 Mo.
LIBOR + 3.75%, 0.75% Floor................................... 7.50% 07/25/26 1,239,884
28,037,446 Verscend Technologies, Inc. (Cotiviti), New Term Loan B-1,
1 Mo. LIBOR + 4.00%, 0.00% Floor............................. 7.75% 08/27/25 27,651,932
---------------
38,451,901
---------------
INSURANCE BROKERS -- 0.2%
8,830 HUB International Ltd., New Term Loan B-3, 2 Mo. LIBOR +
3.25%, 0.75% Floor........................................... 7.23% 04/25/25 8,663
3,461,509 HUB International Ltd., New Term Loan B-3, 3 Mo. LIBOR +
3.25%, 0.75% Floor........................................... 7.53% 04/25/25 3,395,809
---------------
3,404,472
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.3%
3,258,316 Numericable (Altice France S.A. or SFR), Term Loan B-13,
3 Mo. LIBOR + 4.00%, 0.00% Floor............................. 6.91% 08/14/26 2,978,655
1,894,000 Zayo Group Holdings, Inc., Initial Dollar Term Loan, 1 Mo.
LIBOR + 3.00%, 0.00% Floor................................... 6.75% 03/09/27 1,530,352
---------------
4,509,007
---------------
RESTAURANTS -- 0.1%
1,882,659 Portillo's Holdings LLC, Term Loan B-3, 1 Mo. LIBOR + 5.50%,
1.00% Floor.................................................. 9.25% 09/06/24 1,854,419
---------------
See Notes to Financial Statements Page 17
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
PRINCIPAL STATED
VALUE DESCRIPTION RATE (c) MATURITY (d) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALIZED CONSUMER SERVICES -- 0.7%
$ 15,966,625 Asurion LLC, Term Loan B-3 (Second Lien), 1 Mo. LIBOR +
5.25%, 0.00% Floor........................................... 9.00% 01/31/28 $ 11,186,696
---------------
SPECIALIZED FINANCE -- 0.4%
2,531,317 WCG Purchaser Corp. (WIRB-Copernicus Group), Term Loan B,
1 Mo. LIBOR + 4.00%, 1.00% Floor............................. 7.75% 01/08/27 2,393,690
4,196,604 WCG Purchaser Corp. (WIRB-Copernicus Group), Term Loan B,
3 Mo. LIBOR + 4.00%, 1.00% Floor............................. 7.67% 01/08/27 3,968,434
---------------
6,362,124
---------------
SYSTEMS SOFTWARE -- 1.0%
1,221,902 Applied Systems, Inc., Term Loan (Second Lien), 3 Mo. LIBOR
+ 5.50%, 0.75% Floor......................................... 9.17% 09/19/25 1,196,450
5,948,782 BMC Software Finance, Inc. (Boxer Parent), 2021 Replacement
Dollar Term Loan, 1 Mo. LIBOR + 3.75%, 0.00% Floor........... 7.50% 10/02/25 5,709,344
9,169,954 Misys Financial Software Ltd. (Almonde, Inc.) (Finastra), Term
Loan B, 3 Mo. LIBOR + 3.50%, 1.00% Floor..................... 6.87% 06/13/24 8,270,748
---------------
15,176,542
---------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS.................................................... 290,744,468
(Cost $313,087,849) ---------------
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS -- 0.1%
PHARMACEUTICALS -- 0.1%
259,956 Akorn, Inc. (e) (f).......................................................................... 1,559,736
(Cost $2,979,179) ---------------
WARRANTS -- 0.0%
MOVIES & ENTERTAINMENT -- 0.0%
828,940 Cineworld Group PLC, expiring 11/23/25 (e) (g)............................................... 47,532
(Cost $0) ---------------
RIGHTS -- 0.0%
ELECTRIC UTILITIES -- 0.0%
1,629 Vistra Energy Corp., no expiration date (e) (g).............................................. 1,955
(Cost $2,830) ---------------
MONEY MARKET FUNDS -- 0.5%
7,723,711 Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class -
2.85% (h)................................................................................. 7,723,711
(Cost $7,723,711) ---------------
TOTAL INVESTMENTS -- 103.9%.................................................................. 1,659,534,048
(Cost $1,880,065,828) ---------------
BORROWINGS -- (7.2)%......................................................................... (115,708,737)
NET OTHER ASSETS AND LIABILITIES -- 3.3%..................................................... 52,833,624
---------------
NET ASSETS -- 100.0%......................................................................... $ 1,596,658,935
===============
Page 18 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2022
(a) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), and may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be liquid by First Trust Advisors L.P.
("First Trust" or the "Advisor"). Although market instability can result
in periods of increased overall market illiquidity, liquidity for each
security is determined based on security specific factors and assumptions,
which require subjective judgment. At October 31, 2022, securities noted
as such amounted to $1,239,037,133 or 77.6% of net assets.
(b) This security or a portion of this security is segregated as collateral
for borrowings.
(c) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests generally pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium. These
base lending rates are generally (i) the lending rate offered by one or
more major European banks, such as the LIBOR, (ii) the SOFR obtained from
the U.S. Department of the Treasury's Office of Financial Research, (iii)
the prime rate offered by one or more United States banks or (iv) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
or SOFR floor that establishes a minimum LIBOR or SOFR rate. When a range
of rates is disclosed, the Fund holds more than one contract within the
same tranche with identical LIBOR or SOFR period, spread and floor, but
different LIBOR or SOFR reset dates.
(d) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(e) Non-income producing security.
(f) Security received in a transaction exempt from registration under the 1933
Act. The security may be resold pursuant to an exemption from registration
under the 1933 Act, typically to qualified institutional buyers (see Note
2F - Restricted Securities in the Notes to Financial Statements).
(g) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the Advisor.
(h) Rate shown reflects yield as of October 31, 2022.
LIBOR - London Interbank Offered Rate
SOFR - Secured Overnight Financing Rate
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2022 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2022 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Corporate Bonds and Notes*......................... $ 1,232,220,528 $ -- $ 1,232,220,528 $ --
Foreign Corporate Bonds and Notes*................. 127,236,118 -- 127,236,118 --
Senior Floating-Rate Loan Interests*............... 290,744,468 -- 290,744,468 --
Common Stocks*..................................... 1,559,736 -- 1,559,736 --
Warrants*.......................................... 47,532 -- 47,532 --
Rights*............................................ 1,955 -- 1,955 --
Money Market Funds................................. 7,723,711 7,723,711 -- --
--------------- --------------- --------------- ---------------
Total Investments.................................. $ 1,659,534,048 $ 7,723,711 $ 1,651,810,337 $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
See Notes to Financial Statements Page 19
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2022
ASSETS:
Investments, at value..................................................... $ 1,659,534,048
Cash...................................................................... 230,727
Receivables:
Investment securities sold............................................. 38,058,429
Interest............................................................... 26,049,501
Capital shares sold.................................................... 19,740
Dividends.............................................................. 13,238
---------------
Total Assets........................................................... 1,723,905,683
---------------
LIABILITIES:
Borrowings................................................................ 115,708,737
Payables:
Capital shares redeemed ............................................... 7,895,778
Investment securities purchased........................................ 2,206,250
Investment advisory fees............................................... 1,283,832
Margin interest expense................................................ 152,151
---------------
Total Liabilities...................................................... 127,246,748
---------------
NET ASSETS................................................................ $ 1,596,658,935
===============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 1,983,636,171
Par value................................................................. 404,500
Accumulated distributable earnings (loss)................................. (387,381,736)
---------------
NET ASSETS................................................................ $ 1,596,658,935
===============
NET ASSET VALUE, per share................................................ $ 39.47
===============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)................................. 40,450,002
---------------
Investments, at cost...................................................... $ 1,880,065,828
===============
Page 20 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2022
INVESTMENT INCOME:
Interest.................................................................. $ 140,084,711
Margin interest rebate.................................................... 710,938
Dividends................................................................. 64,818
---------------
Total investment income................................................ 140,860,467
---------------
EXPENSES:
Investment advisory fees.................................................. 18,193,995
Margin interest expense................................................... 6,141,166
---------------
Total expenses......................................................... 24,335,161
---------------
NET INVESTMENT INCOME (LOSS).............................................. 116,525,306
---------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................ (116,465,162)
Investments sold short................................................. 13,544
---------------
Net realized gain (loss).................................................. (116,451,618)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................ (241,531,702)
Investments sold short................................................. (10,087)
Unfunded loan commitments.............................................. 2,897
---------------
Net change in unrealized appreciation (depreciation)...................... (241,538,892)
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... (357,990,510)
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ (241,465,204)
===============
See Notes to Financial Statements Page 21
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2022 10/31/2021
--------------- ---------------
OPERATIONS:
Net investment income (loss).............................................. $ 116,525,306 $ 116,232,335
Net realized gain (loss).................................................. (116,451,618) 16,759,767
Net change in unrealized appreciation (depreciation)...................... (241,538,892) 18,501,627
--------------- ---------------
Net increase (decrease) in net assets resulting from operations........... (241,465,204) 151,493,729
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment operations..................................................... (121,509,986) (123,580,505)
Return of capital......................................................... (5,652,770) --
--------------- ---------------
Total distributions to shareholders....................................... (127,162,756) (123,580,505)
--------------- ---------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold................................................. 249,122,772 406,718,627
Cost of shares redeemed................................................... (590,275,979) (102,317,490)
--------------- ---------------
Net increase (decrease) in net assets resulting
from shareholder transactions.......................................... (341,153,207) 304,401,137
--------------- ---------------
Total increase (decrease) in net assets................................... (709,781,167) 332,314,361
NET ASSETS:
Beginning of period....................................................... 2,306,440,102 1,974,125,741
--------------- ---------------
End of period............................................................. $ 1,596,658,935 $ 2,306,440,102
=============== ===============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................... 48,300,002 42,000,002
Shares sold............................................................... 5,700,000 8,400,000
Shares redeemed........................................................... (13,550,000) (2,100,000)
--------------- ---------------
Shares outstanding, end of period......................................... 40,450,002 48,300,002
=============== ===============
Page 22 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ........... $ (241,465,204)
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Purchases of investments............................................ (1,686,255,429)
Borrowed investments sold short..................................... 3,493,500,557
Cost to cover short positions....................................... (3,789,665,405)
Sales, maturities and paydowns of investments....................... 2,213,172,143
Net amortization/accretion of premiums/discounts on investments..... 743,040
Net realized gain/loss on investments............................... 116,465,162
Net realized gain/loss on investments sold short.................... (13,544)
Net change in unrealized appreciation/depreciation on investments and
unfunded loan commitments........................................ 241,528,805
Net change in unrealized appreciation/depreciation on investments
sold short....................................................... 10,087
CHANGES IN ASSETS AND LIABILITIES
Decrease in interest receivable..................................... 1,044,565
Increase in dividends receivable.................................... (13,164)
Increase in margin interest expense payable......................... 23,941
Decrease in investment advisory fees payable........................ (585,257)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 348,490,297
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold........................................... 249,103,033
Cost of shares redeemed............................................. (582,380,201)
Distributions to shareholders from investment operations............ (121,509,986)
Distributions to shareholders from return of capital................ (5,652,770)
Net proceeds from borrowings........................................ 112,055,810
---------------
CASH USED IN FINANCING ACTIVITIES......................................... (348,384,114)
---------------
Decrease in cash and restricted cash...................................... 106,183
Cash and restricted cash at beginning of period........................... 124,544
---------------
CASH AND RESTRICTED CASH AT END OF PERIOD................................. $ 230,727
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................. $ 6,117,225
===============
CASH AND RESTRICTED CASH RECONCILIATION:
Cash................................................................ $ 230,727
Restricted Cash..................................................... --
---------------
CASH AND RESTRICTED CASH AT END OF PERIOD:................................ $ 230,727
===============
See Notes to Financial Statements Page 23
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2022 2021 2020 2019 2018
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 47.75 $ 47.00 $ 48.06 $ 47.02 $ 48.95
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 2.63 2.47 2.33 2.49 2.52
Net realized and unrealized gain (loss) (8.00) 0.91 (1.00) 1.13 (1.76)
---------- ---------- ---------- ---------- ----------
Total from investment operations (5.37) 3.38 1.33 3.62 0.76
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (2.78) (2.63) (2.39) (2.56) (2.69)
Return of capital (0.13) -- -- (0.02) (0.00) (a)
---------- ---------- ---------- ---------- ----------
Total distributions (2.91) (2.63) (2.39) (2.58) (2.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 39.47 $ 47.75 $ 47.00 $ 48.06 $ 47.02
========== ========== ========== ========== ==========
TOTAL RETURN (b) (11.56)% 7.25% 2.92% 7.90% 1.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,596,659 $2,306,440 $1,974,126 $1,432,088 $1,253,035
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 1.27% 1.05% 1.01% 1.23% 1.16%
Ratio of net expenses to average net assets
excluding interest expense 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of net investment income (loss) to average
net assets 6.08% 5.11% 5.02% 5.22% 5.26%
Portfolio turnover rate (c) 39% 50% 68% 50% 52%
(a) Amount represents less than $0.01 per share.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) 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.
Page 24 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of twelve funds that are offering shares. This
report covers the First Trust Tactical High Yield ETF (the "Fund"), a
diversified series of the Trust which trades under the ticker "HYLS" on The
Nasdaq Stock Market LLC ("Nasdaq"). The Fund represents a separate series of
beneficial interest in the Trust. Unlike conventional mutual funds, the Fund
issues and redeems shares on a continuous basis, at net asset value ("NAV"),
only in large blocks of shares known as "Creation Units."
The primary investment objective of the Fund is to provide current income. The
Fund's secondary investment objective is to provide capital appreciation. Under
normal market conditions, the Fund invests at least 80% of its net assets
(including investment borrowings) in high yield debt securities that are rated
below investment grade at the time of purchase or unrated securities deemed by
the Fund's advisor to be of comparable quality. Below investment grade
securities are those that, at the time of purchase, are rated lower than "BBB-"
by S&P Global Ratings, or lower than "Baa3" by Moody's Investors Service, Inc.,
or comparably rated by another nationally recognized statistical rating
organization. High yield debt securities that are rated below investment grade
are commonly referred to as "junk" debt. Such securities may include U.S. and
non-U.S. corporate debt obligations, bank loans and convertible bonds. For
purposes of determining whether a security is below investment grade, the lowest
available rating will be considered.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification Topic 946, "Financial Services-Investment
Companies." The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of the financial
statements. The preparation of the financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent readily available market quotations such as last sale or
official closing prices from a national or foreign exchange (i.e., a regulated
market) and are primarily obtained from third-party pricing services. Fair value
prices represent any prices not considered market value prices and are either
obtained from a third-party pricing service or are determined by the Pricing
Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First
Trust" or the "Advisor"), in accordance with valuation procedures approved by
the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act
and rules thereunder. Investments valued by the Advisor's Pricing Committee, if
any, are footnoted as such in the footnotes to the Portfolio of Investments. The
Fund's investments are valued as follows:
Corporate bonds, corporate notes, U.S. government securities and other
debt securities are fair valued on the basis of valuations provided by a
third-party pricing service approved by the Advisor's Pricing Committee,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
Common stocks and other equity securities listed on any national or
foreign exchange (excluding Nasdaq and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the primary exchange for such securities.
Shares of open-end funds are valued based on NAV per share.
Securities traded in an over-the-counter market are valued at the mean of
their most recent bid and asked price, if available, and otherwise at
their last trade price.
Senior Floating-Rate Loan Interests ("Senior Loans")(1) are not listed on
any securities exchange or board of trade. Senior Loans are typically
bought and sold by institutional investors in individually negotiated
private transactions that function in many respects like an
over-the-counter secondary market, although typically no formal
market-makers exist. This market, while having grown substantially since
its inception, generally has fewer trades and less liquidity than the
secondary market for other types of securities. Some Senior Loans have few
or no trades, or trade infrequently, and information regarding a specific
Senior Loan may not be widely available or may be incomplete. Accordingly,
determinations of the market value of Senior Loans may be based on
infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically,
Senior Loans are fair valued using information provided by a third-party
pricing service. The third-party pricing service primarily uses
over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Advisor's Pricing Committee at
fair value. These securities generally include, but are not limited to,
restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended (the "1933 Act")) for
which a third-party pricing service is unable to provide a market price;
securities whose trading has been formally suspended; a security whose market or
fair value price is not available from a pre-established pricing source; a
security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the most recent price provided by a pricing service;
2) the fundamental business data relating to the borrower/issuer;
3) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
4) the type, size and cost of a security;
5) the financial statements of the borrower/issuer, or the
financial condition of the country of issue;
6) the credit quality and cash flow of the issuer/borrower, or
the country of issue, based on the Pricing Committee's,
sub-adviser's or portfolio manager's analysis, as applicable,
or external analysis;
7) the information as to any transactions in or offers for the
security;
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
8) the price and extent of public trading in similar securities
of the issuer/borrower, or comparable companies;
9) the coupon payments;
10) the quality, value and salability of collateral, if any,
securing the security;
11) the business prospects of the borrower/issuer, including any
ability to obtain money or resources from a parent or
affiliate and an assessment of the issuer's management;
12) the prospects for the borrower's/issuer's industry, and
multiples (of earnings and/or cash flows) being paid for
similar businesses in that industry;
13) borrower's/issuer's competitive position within the industry;
14) borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
15) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2022, is
included with the Fund's Portfolio of Investments.
In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act, establishing
requirements to determine fair value in good faith for purposes of the 1940 Act.
The rule permits fund boards to designate a fund's investment adviser to perform
fair value determinations, subject to board oversight and certain other
conditions. The rule also defines when market quotations are "readily available"
for purposes of the 1940 Act and requires a fund to fair value a portfolio
investment when a market quotation is not readily available. The SEC also
adopted new Rule 31a-4 under the 1940 Act, which sets forth recordkeeping
requirements associated with fair value determinations. The compliance date for
Rule 2a-5 and Rule 31a-4 was September 8, 2022.
Effective September 8, 2022 and pursuant to the requirements of Rule 2a-5, the
Trust's Board of Trustees designated the Advisor as its valuation designee to
perform fair value determinations and approved new Advisor Valuation Procedures
for the Trust.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
The United Kingdom's Financial Conduct Authority (the "FCA"), which regulates
the London Interbank Offered Rates ("LIBOR") announced on March 5, 2021 that it
intended to phase-out all LIBOR reference rates, beginning December 31, 2021.
Since that announcement, the FCA has ceased publication of all non-USD LIBOR
reference rates and the 1-week and 2-month USD LIBOR reference rates as of
December 31, 2021. The remaining USD LIBOR settings will cease to be published
or no longer be representative immediately after June 30, 2023. The
International Swaps and Derivatives Association, Inc. ("ISDA") confirmed that
the FCA's March 5, 2021 announcement of its intention to cease providing LIBOR
reference rates, constituted an index cessation event under the Interbank
Offered Rates ("IBOR") Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks
Protocol for all 35 LIBOR settings and confirmed that the spread adjustment to
be used in ISDA fallbacks was fixed as of the date of the announcement.
Page 27
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
In the United States, the Alternative Reference Rates Committee (the "ARRC"), a
group of market participants convened by the Board of Governors of the Federal
Reserve System and the Federal Reserve Bank of New York in cooperation with
other federal and state government agencies, has since 2014 undertaken efforts
to identify U.S. dollar reference interest rates as alternatives to LIBOR and to
facilitate the mitigation of LIBOR-related risks. In June 2017, the ARRC
identified the Secured Overnight Financing Rate ("SOFR"), a broad measure of the
cost of cash overnight borrowing collateralized by U.S. Treasury securities, as
the preferred alternative for U.S. dollar LIBOR. The Federal Reserve Bank of New
York began daily publishing of SOFR in April 2018. There is no assurance that
any alternative reference rate, including SOFR, will be similar to or produce
the same value or economic equivalence as LIBOR or that instruments using an
alternative rate will have the same volume or liquidity.
At this time, it is not possible to predict the full impact of the elimination
of LIBOR and the establishment of an alternative reference rate on the Fund or
its investments.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with current value at least equal to the amount of
its when-issued, delayed-delivery or forward purchase commitments. The Fund had
no when-issued, delayed-delivery, or forward purchase commitments (other than
unfunded loan commitments discussed below) as of October 31, 2022.
C. SHORT SALES
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When the Fund engages in a short sale, the Fund
must borrow the security sold short and deliver the security to the
counterparty. Short selling allows the Fund to profit from a decline in a market
price to the extent such decline exceeds the transaction costs and the costs of
borrowing the securities. The Fund is charged a fee or premium to borrow the
securities sold short and is obligated to repay the lenders of the securities.
Any dividends or interest that accrues on the securities during the period of
the loan are due to the lenders. A gain, limited to the price at which the
security was sold short, or a loss, unlimited in size, will be recognized upon
the termination of the short sale; which is effected by the Fund purchasing the
security sold short and delivering the security to the lender. Any such gain or
loss may be offset, completely or in part, by the change in the value of the
long portion of the Fund's portfolio. The Fund is subject to the risk it may be
unable to reacquire a security to terminate a short position except at a price
substantially in excess of the last quoted price. Also, there is the risk that
the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund. There were no short sales outstanding as of October
31, 2022.
The Fund has established an account with Pershing, LLC for the purpose of
purchasing or borrowing securities on margin. The Fund pays interest on any
margin balance, which is calculated as the daily margin account balance times
the broker's margin interest rate. At October 31, 2022, the Fund had
$115,708,737 in borrowings, which approximates fair value, as shown in
"Borrowings" on the Statement of Assets and Liabilities. The borrowings are
categorized as Level 2 within the fair value hierarchy. The Fund is charged
interest on debit margin balance at a rate equal to the Overnight Bank Funding
Rate plus 75 basis points. With regard to securities held short, the Fund is
credited a rebate equal to the market value of its short positions at a rate
equal to the Overnight Bank Funding Rate less 35 basis points. This rebate rate
applies to easy to borrow securities. Securities that are hard to borrow may
earn a rebate that is less than the foregoing or may be subject to a premium
charge on a security by security basis. The different rebate rate is determined
at the time of a short sale request. At October 31, 2022, the Fund had a debit
margin balance of $115,708,737 with an interest rate of 3.82%. For the fiscal
year ended October 31, 2022, the Fund had margin interest expense of $6,141,166,
as shown on the Statement of Operations. For the fiscal year ended October 31,
2022, the average margin balance and interest rates were $361,400,312 and 1.78%,
respectively.
D. RESTRICTED CASH
Restricted cash includes cash on deposit with other banks or brokers that is
legally restricted as to the withdrawal and primarily serves as collateral for
investments sold short. The Fund presents restricted cash activity within
"Increase in cash and restricted cash" and as part of "Cash and restricted cash
at beginning of period" and "Cash and restricted cash at end of period" in the
Statement of Cash Flows, along with a reconciliation of those balances in the
Statement of Assets and Liabilities. There was no restricted cash held as of
October 31, 2022.
Page 28
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
E. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. Unfunded loan commitments are marked-to-market daily, and
any unrealized appreciation (depreciation) is included in the Statement of
Assets and Liabilities and Statement of Operations. In connection with these
commitments, the Fund earns a commitment fee typically set as a percentage of
the commitment amount. The commitment fees are included in "Interest" on the
Statement of Operations. As of October 31, 2022, the Fund had no unfunded loan
commitments.
F. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of October 31, 2022, the Fund held restricted
securities as shown in the following table that the Advisor has deemed illiquid
pursuant to procedures adopted by the Trust's Board of Trustees. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security-specific factors and
assumptions, which require subjective judgment. The Fund does not have the right
to demand that such securities be registered. These securities are valued
according to the valuation procedures as stated in the Portfolio Valuation note
(Note 2A) and are not expressed as a discount to the carrying value of a
comparable unrestricted security.
ACQUISITION CURRENT CARRYING % OF NET
SECURITY DATE SHARES PRICE COST VALUE ASSETS
-------------------------------------------------------------------------------------------------------------------------
Akorn, Inc. 10/15/2020 259,956 $6.00 $2,979,179 $1,559,736 0.10%
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly by
the Fund, or as the Board of Trustees may determine from time to time.
Distributions of net realized gains earned by the Fund, if any, are distributed
at least annually. The Fund may also designate a portion of the amount paid to
redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased 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.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on significantly modified portfolio securities
held by the Fund and have no impact on net assets or NAV per share. Temporary
differences, which arise from recognizing certain items of income, expense and
gain/loss in different periods for financial statement and tax purposes, will
reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October
31, 2022 and 2021 was as follows:
Distributions paid from: 2022 2021
Ordinary income................................. $ 121,509,986 $ 123,580,505
Capital gains................................... -- --
Return of capital............................... 5,652,770 --
As of October 31, 2022, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................... $ --
Accumulated capital and other gain (loss)....... (160,242,757)
Net unrealized appreciation (depreciation)...... (227,138,979)
H. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2019,
2020, 2021, and 2022 remain open to federal and state audit. As of October 31,
2022, management has evaluated the application of these standards to the Fund
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. As of October 31, 2022, the
Fund had non-expiring capital loss carryforwards available for federal income
tax purposes of $160,242,757.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2022, the Fund had no
net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings
(loss) (which consists of accumulated net investment income (loss), accumulated
net realized gain (loss) on investments and net unrealized appreciation
(depreciation) on investments) on the Statement of Assets and Liabilities that
more closely represent their tax character, certain adjustments have been made
to paid-in capital, accumulated net investment income (loss) and accumulated net
realized gain (loss) on investments. These adjustments are primarily due to the
difference between book and tax treatments of income and gains on various
investment securities held by the Fund. The results of operations and net assets
were not affected by these adjustments. For the fiscal year ended October 31,
2022, the adjustments for the Fund were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss)
Income (Loss) on Investments Paid-in Capital
-------------- -------------- ---------------
$ 6,281,983 $ (6,178,140) $ (103,843)
As of October 31, 2022, the aggregate cost, gross unrealized appreciation, gross
unrealized depreciation, and net unrealized appreciation/(depreciation) on
investments (including short positions and derivatives, if any) for federal
income tax purposes were as follows:
Gross Gross Net Unrealized
Unrealized Unrealized Appreciation
Tax Cost Appreciation (Depreciation) (Depreciation)
-------------- -------------- --------------- ---------------
$1,886,673,027 $ 643,438 $ (227,782,417) $ (227,138,979)
I. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3). The Fund is subject to an interest expense
due to the costs associated with the Fund's short positions in securities.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, expenses associated with short sale transactions, distribution and
service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses. The Fund has agreed to pay First Trust an annual unitary management
fee equal to 0.95% of its average daily net assets.
Page 30
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee Chairs
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended October 31, 2022, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, investments sold
short and in-kind transactions, were $871,871,292 and $1,437,362,407,
respectively. The cost of purchases to cover short sales and the proceeds of
short sales were $3,789,665,405 and $3,493,500,557, respectively.
For the fiscal year ended October 31, 2022, the cost of in-kind purchases and
proceeds from in-kind sales were $2,497,586 and $0, respectively.
5. BORROWINGS
The Trust, on behalf of the Fund, along with the First Trust Series Fund and
First Trust Variable Insurance Trust, has a $200 million Credit Agreement with
BNYM ("Line of Credit"), to be a liquidity backstop during periods of high
redemption volume. A commitment fee of 0.25% of the daily amount of the excess
of the commitment amount over the outstanding principal balance of the loans
will be charged by BNYM, which First Trust allocates amongst the funds that have
access to the Line of Credit. To the extent that the Fund accesses the Line of
Credit, there would also be an interest fee charged. The Fund did not have any
borrowings outstanding during the fiscal year ended October 31, 2022 associated
with the Line of Credit.
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
The Fund generally issues and redeems its shares in primary market transactions
through a creation and redemption mechanism and does not sell or redeem
individual shares. Instead, financial entities known as "Authorized
Participants" have contractual arrangements with the Fund's service providers to
purchase and redeem Fund shares directly with the Fund in large blocks of shares
known as "Creation Units." Prior to the start of trading on every business day,
the Fund publishes through the National Securities Clearing Corporation ("NSCC")
the "basket" of securities, cash or other assets that it will accept in exchange
for a Creation Unit of the Fund's shares. An Authorized Participant that wishes
to effectuate a creation of the Fund's shares deposits with the Fund the
"basket" of securities, cash or other assets identified by the Fund that day,
and then receives the Creation Unit of the Fund's shares in return for those
assets. After purchasing a Creation Unit, the Authorized Participant may
continue to hold the Fund's shares or sell them in the secondary market. The
redemption process is the reverse of the purchase process: the Authorized
Participant redeems a Creation Unit of the Fund's shares for a basket of
securities, cash or other assets. The combination of the creation and redemption
process with secondary market trading in the Fund's shares and underlying
securities provides arbitrage opportunities that are designed to help keep the
market price of the Fund's shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These
fees may vary based upon various fact-based circumstances, including, but not
limited to, the composition of the securities included in the Creation Unit or
the countries in which the transactions are settled. The price for each Creation
Unit will equal the daily NAV per share of the Fund times the number of shares
in a Creation Unit, plus the fees described above and, if applicable, any
operational processing and brokerage costs, transfer fees, stamp taxes and part
or all of the spread between the expected bid and offer side of the market
related to the securities comprising the creation basket.
Page 31
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022
The Fund also imposes fees in connection with the redemption of Creation Units.
These fees may vary based upon various fact-based circumstances, including, but
not limited to, the composition of the securities included in the Creation Unit
or the countries in which the transactions are settled. The price received for
each Creation Unit will equal the daily NAV per share of the Fund times the
number of shares in a Creation Unit, minus the fees described above and, if
applicable, any operational processing and brokerage costs, transfer fees, stamp
taxes and part or all of the spread between the expected bid and offer side of
the market related to the securities comprising the redemption basket. Investors
who use the services of a broker or other such intermediary in addition to an
Authorized Participant to effect a redemption of a Creation Unit may also be
assessed an amount to cover the cost of such services. The redemption fee
charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits
redemption fees to no more than 2% of the value of the shares redeemed.
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 31, 2024.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
At a meeting on October 24, 2022, the Board of Trustees approved a breakpoint
pricing arrangement for each of the series of the Trust, including the Fund.
Pursuant to this arrangement, which is effective as of November 1, 2022, the
management fee the Fund pays to First Trust, as investment manager, will be
discounted as the Fund's net assets reach certain predefined levels.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND THE BOARD OF TRUSTEES OF FIRST TRUST EXCHANGE-TRADED
FUND IV:
OPINION ON THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS
We have audited the accompanying statement of assets and liabilities of First
Trust Tactical High Yield ETF (the "Fund"), a series of the First Trust
Exchange-Traded Fund IV, including the portfolio of investments, as of October
31, 2022, the related statements of operations and cash flows for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, the financial highlights for each of the five years in the
period then ended, and the related notes. In our opinion, the financial
statements and financial highlights present fairly, in all material respects,
the financial position of the Fund as of October 31, 2022, and the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended in conformity
with accounting principles generally accepted in the United States of America.
BASIS FOR OPINION
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on the Fund's
financial statements and financial highlights based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to
the Fund in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement, whether due to error or fraud. The Fund is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Fund's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements and financial highlights, whether due
to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements and financial highlights. Our audits
also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2022, by correspondence with
the custodian, agent banks and brokers; when replies were not received from
agent banks and brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 22, 2022
We have served as the auditor of one or more First Trust investment companies
since 2001.
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website at www.ftportfolios.com; and (3) on the Securities and
Exchange Commission's ("SEC") website at www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files portfolio holdings information for each month in a fiscal quarter
within 60 days after the end of the relevant fiscal quarter on Form N-PORT.
Portfolio holdings information for the third month of each fiscal quarter will
be publicly available on the SEC's website at www.sec.gov. The Fund's complete
schedule of portfolio holdings for the second and fourth quarters of each fiscal
year is included in the semi-annual and annual reports to shareholders,
respectively, and is filed with the SEC on Form N-CSR. The semi-annual and
annual report for the Fund is available to investors within 60 days after the
period to which it relates. The Fund's Forms N-PORT and Forms N-CSR are
available on the SEC's website listed above.
FEDERAL TAX INFORMATION
Distributions paid to the foreign shareholders during the Fund's fiscal year
ended October 31, 2022 that were properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," may not be
subject to federal income tax provided that the income was earned directly by
such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the fiscal year ended October 31, 2022, none qualify for the
corporate dividends received deduction available to corporate shareholders or as
qualified dividend income.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. CERTAIN GENERAL RISKS THAT MAY BE
APPLICABLE TO A FUND ARE IDENTIFIED BELOW, BUT NOT ALL OF THE MATERIAL RISKS
RELEVANT TO EACH FUND ARE INCLUDED IN THIS REPORT AND NOT ALL OF THE RISKS BELOW
APPLY TO EACH FUND. THE MATERIAL RISKS OF INVESTING IN EACH FUND ARE SPELLED OUT
IN ITS PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND OTHER REGULATORY
FILINGS. BEFORE INVESTING, YOU SHOULD CONSIDER EACH FUND'S INVESTMENT OBJECTIVE,
RISKS, CHARGES AND EXPENSES, AND READ EACH FUND'S PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION CAREFULLY. YOU CAN DOWNLOAD EACH FUND'S PROSPECTUS AT
WWW.FTPORTFOLIOS.COM OR CONTACT FIRST TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO
REQUEST A PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION ABOUT EACH FUND.
CONCENTRATION RISK. To the extent that a fund is able to invest a significant
percentage of its assets in a single asset class or the securities of issuers
within the same country, state, region, industry or sector, an adverse economic,
business or political development may affect the value of the fund's investments
more than if the fund were more broadly diversified. A fund that tracks an index
will be concentrated to the extent the fund's corresponding index is
concentrated. A concentration makes a fund more susceptible to any single
occurrence and may subject the fund to greater market risk than a fund that is
more broadly diversified.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
CYBER SECURITY RISK. The funds are susceptible to potential operational risks
through breaches in cyber security. A breach in cyber security refers to both
intentional and unintentional events that may cause a fund to lose proprietary
information, suffer data corruption or lose operational capacity. Such events
could cause a fund to incur regulatory penalties, reputational damage,
additional compliance costs associated with corrective measures and/or financial
loss. In addition, cyber security breaches of a fund's third-party service
providers, such as its administrator, transfer agent, custodian, or sub-advisor,
as applicable, or issuers in which the fund invests, can also subject a fund to
many of the same risks associated with direct cyber security breaches.
DEFINED OUTCOME FUNDS RISK. To the extent a fund's investment strategy is
designed to deliver returns tied to the price performance of an underlying ETF,
an investor may not realize the returns the fund seeks to achieve if that
investor does not hold shares for the entire target outcome period. In the event
an investor purchases shares after the first day of the target outcome period or
sells shares prior to the end of the target outcome period, the buffer that the
fund seeks to provide against a decline in the value of the underlying ETF may
not be available, the enhanced returns that the fund seeks to provide (if any)
may not be available and the investor may not participate in a gain in the value
of the underlying ETF up to the cap for the investor's investment period.
Additionally, the fund will not participate in gains of the underlying ETF above
the cap and a shareholder may lose their entire investment. If the fund seeks
enhanced returns, there are certain time periods when the value of the fund may
fall faster than the value of the underlying ETF, and it is very unlikely that,
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
on any given day during which the underlying ETF share price increases in value,
the fund's share price will increase at the same rate as the enhanced returns
sought by the fund, which is designed for an entire target outcome period.
Trading flexible exchange options involves risks different from, or possibly
greater than, the risks associated with investing directly in securities, such
as less liquidity and correlation and valuation risks. A fund may experience
substantial downside from specific flexible exchange option positions and
certain positions may expire worthless.
DERIVATIVES RISK. To the extent a fund uses derivative instruments such as
futures contracts, options contracts and swaps, the fund may experience losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivative.
These risks are heightened when a fund's portfolio managers use derivatives to
enhance the fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
fund.
EQUITY SECURITIES RISK. To the extent a fund invests in equity securities, the
value of the fund's shares will fluctuate with changes in the value of the
equity securities. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, such as market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase. Equity
securities may decline significantly in price over short or extended periods of
time, and such declines may occur in the equity market as a whole, or they may
occur in only a particular country, company, industry or sector of the market.
ETF RISK. The shares of an ETF trade like common stock and represent an interest
in a portfolio of securities. The risks of owning an ETF generally reflect the
risks of owning the underlying securities, although lack of liquidity in an ETF
could result in it being more volatile and ETFs have management fees that
increase their costs. Shares of an ETF trade on an exchange at market prices
rather than net asset value, which may cause the shares to trade at a price
greater than net asset value (premium) or less than net asset value (discount).
In times of market stress, decisions by market makers to reduce or step away
from their role of providing a market for an ETF's shares, or decisions by an
ETF's authorized participants that they are unable or unwilling to proceed with
creation and/or redemption orders of an ETF's shares, could result in shares of
the ETF trading at a discount to net asset value and in greater than normal
intraday bid-ask spreads.
FIXED INCOME SECURITIES RISK. To the extent a fund invests in fixed income
securities, the fund will be subject to credit risk, income risk, interest rate
risk, liquidity risk and prepayment risk. Income risk is the risk that income
from a fund's fixed income investments could decline during periods of falling
interest rates. Interest rate risk is the risk that the value of a fund's fixed
income securities will decline because of rising interest rates. Liquidity risk
is the risk that a security cannot be purchased or sold at the time desired, or
cannot be purchased or sold without adversely affecting the price. Prepayment
risk is the risk that the securities will be redeemed or prepaid by the issuer,
resulting in lower interest payments received by the fund. In addition to these
risks, high yield securities, or "junk" bonds, are subject to greater market
fluctuations and risk of loss than securities with higher ratings, and the
market for high yield securities is generally smaller and less liquid than that
for investment grade securities.
INDEX OR MODEL CONSTITUENT RISK. Certain funds may be a constituent of one or
more indices or ETF models. As a result, such a fund may be included in one or
more index-tracking exchange-traded funds or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving a
fund, the size of the fund and the market volatility of the fund. Inclusion in
an index could increase demand for the fund and removal from an index could
result in outsized selling activity in a relatively short period of time. As a
result, a fund's net asset value could be negatively impacted and the fund's
market price may be significantly below its net asset value during certain
periods. In addition, index rebalances may potentially result in increased
trading activity in a fund's shares.
INDEX PROVIDER RISK. To the extent a fund seeks to track an index, it is subject
to Index Provider Risk. There is no assurance that the Index Provider will
compile the Index accurately, or that the Index will be determined, maintained,
constructed, reconstituted, rebalanced, composed, calculated or disseminated
accurately. To correct any such error, the Index Provider may carry out an
unscheduled rebalance or other modification of the Index constituents or
weightings, which may increase the fund's costs. The Index Provider does not
provide any representation or warranty in relation to the quality, accuracy or
completeness of data in the Index, and it does not guarantee that the Index will
be calculated in accordance with its stated methodology. Losses or costs
associated with any Index Provider errors generally will be borne by the fund
and its shareholders.
INVESTMENT COMPANIES RISK. To the extent a fund invests in the securities of
other investment vehicles, the fund will incur additional fees and expenses that
would not be present in a direct investment in those investment vehicles.
Furthermore, the fund's investment performance and risks are directly related to
the investment performance and risks of the investment vehicles in which the
fund invests.
LIBOR RISK. To the extent a fund invests in floating or variable rate
obligations that use the London Interbank Offered Rate ("LIBOR") as a reference
interest rate, it is subject to LIBOR Risk. The United Kingdom's Financial
Conduct Authority, which regulates LIBOR has ceased making LIBOR available as a
reference rate over a phase-out period that began December 31, 2021.
Page 35
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
There is no assurance that any alternative reference rate, including the Secured
Overnight Financing Rate ("SOFR") will be similar to or produce the same value
or economic equivalence as LIBOR or that instruments using an alternative rate
will have the same volume or liquidity. The unavailability or replacement of
LIBOR may affect the value, liquidity or return on certain fund investments and
may result in costs incurred in connection with closing out positions and
entering into new trades. Any potential effects of the transition away from
LIBOR on the fund or on certain instruments in which the fund invests can be
difficult to ascertain, and they may vary depending on a variety of factors, and
they could result in losses to the fund.
MANAGEMENT RISK. To the extent that a fund is actively managed, it is subject to
management risk. In managing an actively-managed fund's investment portfolio,
the fund's portfolio managers will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that a fund will
meet its investment objective.
MARKET RISK. Market risk is the risk that a particular security, or shares of a
fund in general, may fall in value. Securities held by a fund, as well as shares
of a fund itself, are subject to market fluctuations caused by factors such as
general economic conditions, political events, regulatory or market
developments, changes in interest rates and perceived trends in securities
prices. Shares of a fund could decline in value or underperform other
investments as a result of the risk of loss associated with these market
fluctuations. In addition, local, regional or global events such as war, acts of
terrorism, spread of infectious diseases or other public health issues,
recessions, or other events could have a significant negative impact on a fund
and its investments. Such events may affect certain geographic regions,
countries, sectors and industries more significantly than others. In February
2022, Russia invaded Ukraine which has caused and could continue to cause
significant market disruptions and volatility within the markets in Russia,
Europe, and the United States. The hostilities and sanctions resulting from
those hostilities could have a significant impact on certain fund investments as
well as fund performance. The COVID-19 global pandemic and the ensuing policies
enacted by governments and central banks have caused and may continue to cause
significant volatility and uncertainty in global financial markets. While the
U.S. has resumed "reasonably" normal business activity, many countries continue
to impose lockdown measures. Additionally, there is no guarantee that vaccines
will be effective against emerging variants of the disease. These events also
adversely affect the prices and liquidity of a fund's portfolio securities or
other instruments and could result in disruptions in the trading markets. Any of
such circumstances could have a materially negative impact on the value of a
fund's shares and result in increased market volatility. During any such events,
a fund's shares may trade at increased premiums or discounts to their net asset
value and the bid/ask spread on a fund's shares may widen.
NON-U.S. SECURITIES RISK. To the extent a fund invests in non-U.S. securities,
it is subject to additional risks not associated with securities of domestic
issuers. Non-U.S. securities are subject to higher volatility than securities of
domestic issuers due to: possible adverse political, social or economic
developments; restrictions on foreign investment or exchange of securities;
capital controls; lack of liquidity; currency exchange rates; excessive
taxation; government seizure of assets; the imposition of sanctions by foreign
governments; different legal or accounting standards; and less government
supervision and regulation of exchanges in foreign countries. Investments in
non-U.S. securities may involve higher costs than investments in U.S.
securities, including higher transaction and custody costs, as well as
additional taxes imposed by non-U.S. governments. These risks may be heightened
for securities of companies located, or with significant operations, in emerging
market countries.
OPERATIONAL RISK. Each fund is subject to risks arising from various operational
factors, including, but not limited to, human error, processing and
communication errors, errors of a fund's service providers, counterparties or
other third-parties, failed or inadequate processes and technology or systems
failures. Each fund relies on third-parties for a range of services, including
custody. Any delay or failure relating to engaging or maintaining such service
providers may affect a fund's ability to meet its investment objective. Although
the funds and the funds' investment advisor seek to reduce these operational
risks through controls and procedures, there is no way to completely protect
against such risks.
PASSIVE INVESTMENT RISK. To the extent a fund seeks to track an index, the fund
will invest in the securities included in, or representative of, the index
regardless of their investment merit. A fund generally will not attempt to take
defensive positions in declining markets.
PREFERRED SECURITIES RISK. Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt securities in a company's capital
structure in terms of priority to corporate income, subjecting them to greater
credit risk than those debt securities. Generally, holders of preferred
securities have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods, at
which time the preferred security holders may obtain limited rights. In certain
circumstances, an issuer of preferred securities may defer payment on the
securities and, in some cases, redeem the securities prior to a specified date.
Preferred securities may also be substantially less liquid than other
securities, including common stock.
VALUATION RISK. The valuation of certain securities may carry more risk than
that of common stock. Uncertainties in the conditions of the financial markets,
unreliable reference data, lack of transparency and inconsistency of valuation
models and processes may lead to inaccurate asset pricing. A fund may hold
investments in sizes smaller than institutionally sized round lot positions
(sometimes referred to as odd lots). However, third-party pricing services
generally provide evaluations on the basis of institutionally-sized round
Page 36
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
lots. If a fund sells certain of its investments in an odd lot transaction, the
sale price may be less than the value at which such securities have been held by
the fund. Odd lots often trade at lower prices than institutional round lots.
There is no assurance that the fund will be able to sell a portfolio security at
the price established by the pricing service, which could result in a loss to
the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT
The Board of Trustees of First Trust Exchange-Traded Fund IV (the "Trust"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Agreement") with First Trust Advisors L.P.
(the "Advisor") on behalf of the First Trust Tactical High Yield ETF (the
"Fund"). The Board approved the continuation of the Agreement for a one-year
period ending June 30, 2023 at a meeting held on June 12-13, 2022. The Board
determined that the continuation of the Agreement is in the best interests of
the Fund in light of the nature, extent and quality of the services provided and
such other matters as the Board considered to be relevant in the exercise of its
business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law, in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 18, 2022 and June 12-13, 2022, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Trustees, submitted on behalf of the Independent Trustees, that, among other
things, outlined: the services provided by the Advisor to the Fund (including
the relevant personnel responsible for these services and their experience); the
unitary fee rate payable by the Fund as compared to fees charged to a peer group
of funds (the "Expense Group") and a broad peer universe of funds (the "Expense
Universe"), each assembled by Broadridge Financial Solutions, Inc.
("Broadridge"), an independent source, and as compared to fees charged to other
clients of the Advisor, including other exchange-traded funds ("ETFs") managed
by the Advisor; the expense ratio of the Fund as compared to expense ratios of
the funds in the Fund's Expense Group and Expense Universe; performance
information for the Fund, including comparisons of the Fund's performance to
that of one or more relevant benchmark indexes and to that of a performance
group of funds and a broad performance universe of funds (the "Performance
Universe"), each assembled by Broadridge; the nature of expenses incurred in
providing services to the Fund and the potential for the Advisor to realize
economies of scale, if any; profitability and other financial data for the
Advisor; any indirect benefits to the Advisor and its affiliate, First Trust
Portfolios L.P. ("FTP"); and information on the Advisor's compliance program.
The Board reviewed initial materials with the Advisor at the meeting held on
April 18, 2022, prior to which the Independent Trustees and their counsel met
separately to discuss the information provided by the Advisor. Following the
April meeting, counsel to the Independent Trustees, on behalf of the Independent
Trustees, requested certain clarifications and supplements to the materials
provided, and the information provided in response to those requests was
considered at an executive session of the Independent Trustees and their counsel
held prior to the June 12-13, 2022 meeting, as well as at the June meeting. The
Board applied its business judgment to determine whether the arrangement between
the Trust and the Advisor continues to be a reasonable business arrangement from
the Fund's perspective. The Board determined that, given the totality of the
information provided with respect to the Agreement, the Board had received
sufficient information to renew the Agreement. The Board considered that
shareholders chose to invest or remain invested in the Fund knowing that the
Advisor manages the Fund and knowing the Fund's unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality
of the services provided by the Advisor under the Agreement. The Board
considered that the Advisor is responsible for the overall management and
administration of the Trust and the Fund and reviewed all of the services
provided by the Advisor to the Fund, as well as the background and experience of
the persons responsible for such services. The Board noted that the Fund is an
actively managed ETF and noted that the Advisor's Leveraged Finance Investment
Team is responsible for the day-to-day management of the Fund's investments. The
Board considered the background and experience of the members of the Leveraged
Finance Investment Team and noted the Board's prior meetings with members of the
Team. The Board considered the Advisor's statement that it applies the same
oversight model internally with its Leveraged Finance Investment Team as it uses
for overseeing external sub-advisors, including portfolio risk monitoring and
performance review. In reviewing the services provided, the Board noted the
compliance program that had been developed by the Advisor and considered that it
includes a robust program for monitoring the Advisor's and the Fund's compliance
with the 1940 Act, as well as the Fund's compliance with its investment
objective, policies and restrictions. The Board also considered a report from
the Advisor with respect to its risk management functions related to the
operation of the Fund. Finally, as part of the Board's consideration of the
Advisor's services, the Advisor, in its written materials and at the April 18,
2022 meeting, described to the Board the scope of its ongoing investment in
additional personnel and infrastructure to maintain and improve the quality of
services provided to the Fund and the other funds in the First Trust Fund
Complex. In light of the information presented and the considerations made, the
Board concluded that the nature, extent and quality of the services provided to
the Trust and the Fund by the Advisor under the Agreement have been and are
expected to remain satisfactory and that the Advisor has managed the Fund
consistent with its investment objective, policies and restrictions.
Page 37
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
The Board considered the unitary fee rate payable by the Fund under the
Agreement for the services provided. The Board considered that as part of the
unitary fee the Advisor is responsible for the Fund's expenses, including the
cost of transfer agency, custody, fund administration, legal, audit and other
services and license fees, if any, but excluding the fee payment under the
Agreement and interest, taxes, brokerage commissions and other expenses
connected with the execution of portfolio transactions, distribution and service
fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any.
The Board received and reviewed information showing the fee rates and expense
ratios of the peer funds in the Expense Group, as well as advisory and unitary
fee rates charged by the Advisor to other fund (including ETFs) and non-fund
clients, as applicable. Because the Fund pays a unitary fee, the Board
determined that expense ratios were the most relevant comparative data point.
Based on the information provided, the Board noted that the unitary fee rate for
the Fund was above the median total (net) expense ratio of the peer funds in the
Expense Group. With respect to the Expense Group, the Board, at the April 18,
2022 meeting, discussed with Broadridge its methodology for assembling peer
groups and discussed with the Advisor limitations in creating peer groups for
actively-managed ETFs and different business models that may affect the pricing
of services among ETF sponsors. The Board took these limitations and differences
into account in considering the peer data. With respect to fees charged to other
non-ETF clients, the Board considered differences between the Fund and other
non-ETF clients that limited their comparability. In considering the unitary fee
rate overall, the Board also considered the Advisor's statement that it seeks to
meet investor needs through innovative and value-added investment solutions and
the Advisor's demonstrated long-term commitment to the Fund and the other funds
in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor for the Fund. The Board determined that this process continues to be
effective for reviewing the Fund's performance. The Board received and reviewed
information comparing the Fund's performance for periods ended December 31, 2021
to the performance of the funds in the Performance Universe and to that of a
benchmark index. Based on the information provided, the Board noted that the
Fund underperformed the Performance Universe median and the benchmark index for
the one-, three- and five-year periods ended December 31, 2021.
On the basis of all the information provided on the unitary fee and performance
of the Fund and the ongoing oversight by the Board, the Board concluded that the
unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the
Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it believes that its expenses
relating to providing advisory services to the Fund will likely increase during
the next twelve months as the Advisor continues to build infrastructure and add
new staff. The Board noted that any reduction in fixed costs associated with the
management of the Fund would benefit the Advisor, but that the unitary fee
structure provides a level of certainty in expenses for the Fund. The Board
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2021 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data, for the same period. The Board noted the
inherent limitations in the profitability analysis and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. In addition, the Board considered indirect benefits described by
the Advisor that may be realized from its relationship with the Fund. The Board
considered that the Advisor had identified as an indirect benefit to the Advisor
and FTP their exposure to investors and brokers who, absent their exposure to
the Fund, may have had no dealings with the Advisor or FTP, and noted that the
Advisor does not utilize soft dollars in connection with the Fund. The Board
concluded that the character and amount of potential indirect benefits to the
Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
BOARD CONSIDERATIONS REGARDING APPROVAL OF AMENDMENT TO THE INVESTMENT
MANAGEMENT AGREEMENT
The Board of Trustees of First Trust Exchange-Traded Fund IV (the "Trust"),
including the Independent Trustees, unanimously approved the amendment (the
"Amendment") of the Investment Management Agreement (the "Agreement") with First
Trust Advisors L.P. (the "Advisor") on behalf of the First Trust Tactical High
Yield ETF (the "Fund").
The Board approved the Amendment at a meeting held on October 24, 2022. As part
of the review process, the Board reviewed information and had preliminary
discussions with the Advisor regarding the proposed Amendment at meetings held
on April 18, 2022, June 12-13, 2022 and September 18-19, 2022. Following those
preliminary discussions, the Board requested and received information from the
Advisor regarding the proposed Amendment, and that information was considered at
an executive session of the Independent Trustees and their counsel held prior to
the October 24, 2022 meeting, as well as at the October meeting.
Page 38
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
In reviewing the Amendment, the Board considered that the purpose of the
Amendment is to modify the unitary fee rate for the Fund under the Agreement by
introducing a breakpoint schedule pursuant to which the unitary fee rate paid by
the Fund to the Advisor will be reduced as assets of the Fund meet certain
thresholds. The Board noted the Advisor's representations that the quality and
quantity of the services provided to the Fund by the Advisor under the Agreement
will not be reduced or modified as a result of the Amendment, and that the
obligations of the Advisor under the Agreement will remain the same in all
respects.
The Board noted that it, including the Independent Trustees, last approved the
continuation of the Agreement for a one-year period ending June 30, 2023 at a
meeting held on June 12-13, 2022. The Board noted that in connection with such
approval it had determined, based upon the information provided, that the terms
of the Agreement were fair and reasonable and that the continuation of the
Agreement was in the best interests of the Fund in light of the nature, extent
and quality of the services provided and such other matters as the Board
considered to be relevant in the exercise of its business judgment.
Based on all of the information considered, the Board, including the Independent
Trustees, unanimously determined that the terms of the Amendment are fair and
reasonable and that the Amendment is in the best interests of the Fund.
REMUNERATION
First Trust Advisors L.P. ("First Trust") is authorised and regulated by the
U.S. Securities and Exchange Commission and is entitled to market shares of
certain funds it manages, including First Trust Tactical High Yield ETF (the
"Fund"), in certain member states in the European Economic Area in accordance
with the cooperation arrangements in Article 42 of the Alternative Investment
Fund Managers Directive (the "Directive"). First Trust is required under the
Directive to make disclosures in respect of remuneration. The following
disclosures are made in line with First Trust's interpretation of currently
available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2021, the amount of remuneration paid (or to
be paid) by First Trust Advisors L.P. in respect of the Fund is $5,751,173. This
figure is comprised of $598,725 paid (or to be paid) in fixed compensation and
$5,152,448 paid (or to be paid) in variable compensation. There were a total of
31 beneficiaries of the remuneration described above. Those amounts include
$617,457 paid (or to be paid) to senior management of First Trust Advisors L.P.
and $5,133,716 paid (or to be paid) to other employees whose professional
activities have a material impact on the risk profiles of First Trust Advisors
L.P. or the Fund (collectively, "Code Staff ").
Code Staff included in the aggregated figures disclosed above are rewarded in
line with First Trust's remuneration policy (the "Remuneration Policy") which is
determined and implemented by First Trust's senior management. The Remuneration
Policy reflects First Trust's ethos of good governance and encapsulates the
following principal objectives:
i. to provide a clear link between remuneration and performance of
First Trust and to avoid rewarding for failure;
ii. to promote sound and effective risk management consistent with the
risk profiles of the funds managed by First Trust; and
iii. to remunerate staff in line with the business strategy, objectives,
values and interests of First Trust and the funds managed by First
Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when
considering and implementing remuneration for Code Staff and considers whether
any potential award to such person(s) would give rise to a conflict of interest.
First Trust does not reward failure, or consider the taking of risk or failure
to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in
respect of performance-related remuneration of Code Staff by reference to a
broad range of measures including (i) individual performance (using financial
and non-financial criteria), and (ii) the overall performance of First Trust.
Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the
senior management sets fixed salaries at a level sufficient to ensure that
variable remuneration incentivises and rewards strong individual performance but
does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Page 39
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
The following tables identify the Trustees and Officers of the Trust. Unless
otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite
400, Wheaton, IL 60187.
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
YEAR OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician, Edward-Elmhurst Medical 223 None
(1951) Group; Physician and Officer,
o Since Inception Wheaton Orthopedics (1990 to 2021)
Thomas R. Kadlec, Trustee o Indefinite Term Retired; President, ADM Investors 223 Director, National Futures
(1957) Services, Inc. (Futures Commission Association and ADMIS
o Since Inception Merchant) (2010 to July 2022) Singapore Ltd.; Formerly,
Director of ADM Investor
Services, Inc., ADM
Investor Services
International, ADMIS
Hong Kong Ltd., and
Futures Industry
Association
Denise M. Keefe, Trustee o Indefinite Term Executive Vice President, Advocate 223 Director and Board Chair
(1964) Aurora Health and President, Advocate of Advocate Home Health
o Since 2021 Aurora Continuing Health Division Services, Advocate Home
(Integrated Healthcare System) Care Products and
Advocate Hospice;
Director and Board Chair of
Aurora At Home (since
2018); Director of
Advocate Physician
Partners Accountable Care
Organization; Director and
Board Chair of RML Long
Term Acute Care
Hospitals; and Director of
Senior Helpers (since
2021)
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 223 Formerly, Director of Trust
(1956) (Financial and Management Consulting) Company of Illinois
o Since Inception
Niel B. Nielson, Trustee o Indefinite Term Senior Advisor (2018 to Present), 223 None
(1954) Managing Director and Chief Operating
o Since Inception Officer (2015 to 2018), Pelita
Harapan Educational Foundation
(Educational Products and Services)
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 223 None
Chairman of the Board Advisors L.P. and First Trust
o Since Inception Portfolios L.P., (1955)
Chairman of the Board of Directors,
BondWave LLC (Software Development
Company) and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 40
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME AND OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
YEAR OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer, First
(1966) Executive Officer Trust Advisors L.P. and First Trust Portfolios L.P.;
o Since 2016 Chief Financial Officer, BondWave LLC (Software
Development Company) and Stonebridge Advisors
LLC (Investment Advisor)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1972) Officer and Chief Accounting First Trust Portfolios L.P.
Officer o Since 2016
W. Scott Jardine Secretary and Chief Legal o Indefinite Term General Counsel, First Trust Advisors L.P. and First
(1960) Officer Trust Portfolios L.P.; Secretary and General Counsel,
o Since Inception BondWave LLC; Secretary, Stonebridge Advisors LLC
Daniel J. Lindquist Vice President o Indefinite Term Managing Director, First Trust Advisors L.P. and First
(1970) Trust Portfolios L.P.
o Since Inception
Kristi A. Maher Chief Compliance Officer and o Indefinite Term Deputy General Counsel, First Trust Advisors L.P. and
(1966) Assistant Secretary First Trust Portfolios L.P.
o Since Inception
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1966) First Trust Portfolios L.P.
o Since Inception
Stan Ueland Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1970) First Trust Portfolios L.P.
o Since Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 41
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2022 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
professional or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
USE OF WEBSITE ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis, to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2022
Page 42
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
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