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First
Trust
Exchange-Traded
Fund IV |
Prospectus
FT Vest S&P 500® Dividend Aristocrats Target
Income ETF®
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Ticker
Symbol: |
KNG |
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Exchange: |
Cboe
BZX |
FT Vest S&P 500® Dividend Aristocrats Target Income
ETF® (the “Fund”) lists and principally trades its
shares on Cboe BZX Exchange, Inc. (“Cboe
BZX,” or the
“Exchange”). Market prices may differ to some
degree from the net asset value of the shares. Unlike mutual funds, the Fund
issues and redeems shares at net asset value, only in large specified blocks of
shares called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund IV (the “Trust”) and an
exchange-traded index fund organized as a separate series of a registered
management investment company.
Except
when aggregated in Creation Units, the shares are not redeemable securities of
the Fund.
The
Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
NOT
FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
March
1, 2024
Summary
Information
(fees paid directly from your investment)
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Maximum
Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price) |
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(expenses that you pay each year as a percentage of the value of your investment)
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Management
Fees |
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Distribution
and Service (12b-1) Fees |
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Other
Expenses |
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Total
Annual Fund Operating Expenses |
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
$ |
3
4
5
6
7
8
9
Calendar Year Total Returns as of 12/31
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10
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1
Year |
5
Years |
Since
Inception |
Inception
Date |
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Return Before
Taxes |
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Return After
Taxes on Distributions |
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Return After
Taxes on Distributions and Sale of Shares |
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Cboe S&P
500® Dividend
Aristocrats Target Income Index
Monthly
Series (reflects no deduction for fees, expenses or
taxes) |
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S&P
500® Dividend
Aristocrats Index (reflects no deduction for
fees,
expenses or taxes) |
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S&P
500® Index
(reflects no deduction for fees, expenses or
taxes) |
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Management
Investment
Advisor
First Trust Advisors
L.P. (“First
Trust”
or the “Advisor”)
Investment
Sub-Advisor
Vest Financial LLC (“Vest” or the “Sub-Advisor”)
Portfolio
Managers
The following persons
serve as portfolio managers to the Fund:
•
Karan Sood, Managing Director of
Vest
•
Howard Rubin, Managing Director of
Vest
The
portfolio managers are primarily and jointly responsible for the day-to-day
management of the Fund. Each portfolio manager has served as
a part of the portfolio management team of the Fund since March
2021.
Purchase
and Sale of Fund Shares
The
Fund issues and redeems shares on a continuous basis, at net asset value, only
in large blocks of shares called “Creation Units.” Individual
shares of the Fund may only be purchased and sold on the secondary market
through a broker-dealer. Since shares of the Fund trade on securities exchanges
in the secondary market at their market price rather than their net asset value,
the Fund’s shares may trade at a price greater than (premium) or less than
(discount) the Fund’s net asset value. An investor may incur costs attributable
to the difference between the highest price a buyer is willing to pay to
purchase shares of the Fund (bid) and the lowest price a seller is willing to
accept for shares of the Fund (ask) when buying or selling shares in the
secondary market (the “bid-ask
spread”). Recent
information, including the Fund’s net asset value, market price, premiums and
discounts, bid-ask spreads and the median bid-ask spread for the Fund’s most
recent fiscal year,is available online at
https://www.ftportfolios.com/Retail/etf/home.aspx.
Tax
Information
The
Fund’s distributions are taxable and will generally be taxed as ordinary income
or capital gains. Distributions on shares held in a
tax-deferred account, while not immediately taxable, will be subject to tax when
the shares are no longer held in a tax-deferred account.
11
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer, registered investment
adviser, bank or other financial intermediary (collectively,
“intermediaries”), First Trust and First Trust Portfolios L.P., the Fund’s
distributor, may pay the intermediary for the sale of Fund shares and related
services. These payments may create a conflict of interest by influencing the
broker-dealer or other intermediary and your salesperson to recommend the Fund
over another investment. Ask your salesperson or visit your financial
intermediary’s website for more information.
12
Additional
Information on the Fund's Investment Objective and Strategies
The Fund is a series
of First Trust Exchange-Traded Fund IV and is regulated as an “investment
company” under the 1940 Act. The Fund operates as an index fund
and is not actively managed by First Trust. As such, the Fund’s investment
objective is to provide investment results that correspond generally to the
price and yield (before the Fund’s fees and expenses) of the Index. In seeking
to achieve this objective, the Fund will normally invest at least 80% of its
total assets (plus any borrowings for investment purposes) in the securities
that comprise the Index. The Fund will generally employ a full replication
strategy, meaning that it will normally invest in all of the securities
comprising the Index in proportion to their weightings in the Index. The Fund’s strategy may involve
frequently buying and selling portfolio securities.
The Fund’s
investment objective and its 80% investment strategy are non-fundamental
policies and may be changed by the Board of Trustees of the Trust (the
“Board”) without shareholder approval.
Unless an investment policy is identified as being fundamental, all investment
policies included in this prospectus and the Fund’s Statement of Additional
Information (“SAI”) are non-fundamental and may be
changed by the Board without shareholder approval. If there is a material change
to the Fund's principal investment strategies, you should consider whether the
Fund remains an appropriate investment for you. There is no guarantee that the
Fund will achieve its investment objective. The Index Provider is not affiliated
with either of the Fund, First Trust or Vest.
The Fund has adopted
a policy pursuant to Rule 35d-1 under the Investment Company Act of 1940 to
invest, under normal circumstances, at least 80% of its
net assets (plus any borrowings for investment purposes) in dividend-paying
securities or investments that provide exposure to dividend-paying securities.
Shareholders will be provided with at least 60-days' prior written notice of any
change to this policy. The market value of derivatives will be used for purposes
of compliance with this 80% policy.
The Fund may not
invest 25% or more of the value of its total assets in securities of issuers in
any one industry or group of industries, except to the extent that
the Fund’s Index is concentrated in an industry or a group of industries. This
restriction does not apply to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or securities of other investment
companies.
While
it is not expected that the Fund will invest in the securities of other
investment companies, any such investments would be subject to
limitations imposed by the 1940 Act and the related rules and interpretations.
The Fund has adopted a policy that it will not invest in other investment
companies in excess of 1940 Act limits in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
Cboe
S&P 500®
Dividend Aristocrats Target Income Index Monthly Series
The Fund seeks
investment results that correspond generally to the price and yield (before the
Fund’s fees and expenses) of an equity index called the Cboe
S&P 500® Dividend Aristocrats Target Income
Index Monthly Series, which is designed with the primary goal of generating an
annualized level of income from stock dividends and option premiums that is
approximately 8% over the annual dividend yield of the S&P 500® Index and a secondary goal of
generating capital appreciation. The Index itself does not generate income. The
equity component of the Index is rebalanced (i.e., weights are reset to
equal-weighted) quarterly, effective after the close of the last business day of
each January, April, July, and October, and reconstituted (i.e., Aristocrat Stocks are added and
deleted according to the Index rules) annually, effective after the close of the
last business day of each January. The S&P 500 Dividend Aristocrat Index,
the underlying index from which the Index equity securities are selected,
targets companies that are currently members of the S&P 500, have increased
dividend payments each year for at least 25 years, and meet certain market
capitalization and liquidity requirements.
In exchange for
additional income in the form of a premium, the Fund will sell a call option on
the stocks in the Index. If the value of the stock on the expiration
date of the option is below the strike price, the option will not be exercised
by the buyer and will expire. If the value of the stock on the expiration date
is above the strike price, then the option finished “in the money.” Then if the
buyer exercises the option, the Fund either sells the stock at the strike price
or pays the buyer the difference between the strike price and the current market
price of the stock. While the Fund
seeks to make distributions that are above the current annual dividend yield of
the S&P 500® Index, there is
no guarantee that the Fund's distribution target will be achieved. The Fund does
not seek to achieve any specific level of total return performance compared with
the total return performance of the S&P 500® Index. Capital
appreciation on the securities held by the Fund may be less than the capital
appreciation of the S&P 500® Index, and the
total return performance of the Fund may be less than the total return
performance of the S&P 500® Index. In the
event the value of the securities held by the Fund exceeds the strike
13
prices
of the call options on such securities, the capital appreciation on such
securities is expected to be less than the capital
appreciation of the S&P 500®.
More
information regarding the Index, including additional detail on the Index
methodology, may be found on the Index Provider’s website.
Neither the Fund, the Board, First Trust, or any of their affiliates, are
responsible for the information set forth on the Index Provider’s website.
Information from the Index Provider’s website and any other information not
expressly included in this prospectus is not incorporated by reference in, and
should not be considered part of this prospectus.
Fund
Investments
Principal
Investments
Equity
Securities
The
Fund invests in equity securities, including common stocks. Common stock
represents an equity ownership interest in issuers. Holders of
common stock are entitled to the income and increase in the value of the assets
and business of the issuers after all debt obligations and obligations to
preferred stockholders are satisfied.
Options
Contracts
An
option is a contract that gives the purchaser (holder) of the option, in return
for a premium, the right to buy from (call) or sell to (put) the
seller (writer) of the option the security or currency underlying the option at
a specified exercise price at any time during the term of the option (normally
not exceeding nine months). The writer of an option has the obligation upon
exercise of the option to deliver the underlying security or currency upon
payment of the exercise price or to pay the exercise price upon delivery of the
underlying security or currency.
To
the extent the Fund enters into derivatives transactions, it will do so pursuant
to Rule 18f-4 under the 1940 Act. Rule 18f-4 requires the
Fund to implement certain policies and procedures designed to manage its
derivatives risks, dependent upon the Fund’s level of exposure to derivative
instruments.
Non-Principal
Investments
Real Estate
Investment Trusts
The Fund may invest
in real estate investment trusts ("REITs"). REITs are financial vehicles that
pool investors’ capital to purchase or finance real estate. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders provided they comply with the
applicable tax requirements.
Cash
Equivalents and Short-Term Investments
Normally,
the Fund invests substantially all of its assets to meet its investment
objective. The Fund may invest the remainder of its assets in
securities with maturities of less than one year or cash equivalents, or it may
hold cash. The percentage of the Fund invested in such holdings varies and
depends on several factors, including market conditions. For temporary defensive
purposes and during periods of high cash inflows or outflows, the Fund may
depart from its principal investment strategies and invest part or all of its
assets in these securities, or it may hold cash. During such periods, the Fund
may not be able to achieve its investment objective. The Fund may adopt a
defensive strategy when the portfolio managers believe securities in which the
Fund normally invests have elevated risks due to political or economic factors
and in other extraordinary circumstances. For more information on eligible
short-term investments, see the SAI.
Illiquid
Investments
The Fund may invest
up to 15% of its net assets in securities and other instruments that are, at the
time of investment, illiquid (determined using the Securities and
Exchange Commission's standard applicable to investment companies, i.e., any investment that the Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment). For this purpose, illiquid
investments may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal
14
securities laws),
securities that may only be resold pursuant to Rule 144A under the Securities
Act of 1933, as amended (the “Securities
Act”), that are deemed
to be illiquid, and certain repurchase agreements.
Disclosure
of Portfolio Holdings
The
Fund’s portfolio holdings are available on the Fund's website at
www.ftportfolios.com. A description of the policies and procedures with
respect to the disclosure of the Fund's portfolio securities is included in the
Fund's SAI, which is also available on the Fund's website.
Risks
of Investing in the Fund
Risk
is inherent in all investing. Investing in the Fund involves risk, including the
risk that you may lose all or part of your investment. There can
be no assurance that the Fund will meet its stated objective. Before you invest,
you should consider the following disclosure pertaining to the Principal Risks
set forth above as well as additional Non-Principal Risks set forth below in
this prospectus. The order of the below risk factors does not indicate the
significance of any particular risk factor.
Principal
Risks
AUTHORIZED
PARTICIPANT CONCENTRATION RISK. Only an authorized
participant may engage in creation or redemption transactions directly with the
Fund. A limited number of institutions act as authorized participants for the
Fund. However, participants are not obligated to make a market in the Fund’s
shares or submit purchase and redemption orders for creation units. To the
extent that these institutions exit the business, reduce their role or are
unable to proceed with creation and/or redemption orders and no other authorized
participant steps forward to create or redeem, the Fund’s shares may trade at a
premium or discount to the Fund’s net asset value and possibly face delisting
and the bid/ask spread on the Fund’s shares may widen.
CONSUMER
STAPLES COMPANIES RISK. The Fund invests
significantly in consumer staples companies. Consumer staples companies provide
products directly to the consumer that are typically considered
non-discretionary items based on consumer purchasing habits. Such products
include food, beverages, household items and tobacco. Companies providing these
products may be affected by the regulation of various product components and
production methods, new laws, regulations or litigation, marketing campaigns,
competitive pricing, enumerated factors, consumer confidence, materials costs
and other factors affecting consumer demand. Changes in the worldwide economy,
demographics, consumer preferences, consumer spending, exploration and
production spending may adversely affect these companies, as well as natural and
man-made disasters, political, social or labor unrest, world events and economic
conditions. Historically, the demand for consumer staples goods has remained
fairly constant regardless of the state of the economy. With some products, such
as food, alcohol and tobacco, demand sometimes increases during economic
downturns. However, price competition among suppliers may be very challenging,
which can drive prices lower and impact returns.
COUNTERPARTY
RISK. If
the Fund enters into an investment or transaction that depends on the
performance of another party, the Fund becomes subject to the credit risk of
that counterparty. The Fund's ability to profit from these types of investments
and transactions depends on the willingness and ability of the Fund’s
counterparty to perform its obligations. If a counterparty fails to meet its
contractual obligations, the Fund may be unable to terminate or realize any gain
on the investment or transaction, resulting in a loss to the Fund. The Fund may
experience significant delays in obtaining any recovery in an insolvency,
bankruptcy, or other reorganization proceeding involving a counterparty
(including recovery of any collateral posted by it) and may obtain only a
limited recovery or may obtain no recovery in such circumstances. If the Fund
holds collateral posted by its counterparty, it may be delayed or prevented from
realizing on the collateral in the event of a bankruptcy or insolvency
proceeding relating to the counterparty. Under applicable law or contractual
provisions, including if the Fund enters into an investment or transaction with
a financial institution and such financial institution (or an affiliate of the
financial institution) experiences financial difficulties, then the Fund may in
certain situations be prevented or delayed from exercising its rights to
terminate the investment or transaction, or to realize on any collateral and may
result in the suspension of payment and delivery obligations of the parties
under such investment or transactions or in another institution being
substituted for that financial institution without the consent of the Fund.
Further, the Fund may be subject to “bail-in” risk under applicable law whereby,
if required by the financial institution's authority, the financial
institution's liabilities could be written down, eliminated or converted into
equity or an alternative instrument of ownership. A bail-in of a financial
institution may result in a reduction in value of some or all of securities and,
if the Fund holds such securities or has entered into a transaction with such a
financial security when a bail-in occurs, the Fund may also be similarly
impacted.
15
COVERED
CALL STRATEGY
RISK. The writer of a
covered call option forgoes any profit from increases in the market value of the
underlying security covering the call option above the sum of the premium and
the strike price of the call but retains the risk of loss if the underlying
security declines in value. The premiums received from the options may not be
sufficient to offset any losses sustained on the underlying stocks over time.
The premiums received from the options may not be sufficient to affect any
losses sustained from the underlying stocks over time. The Fund will have no
control over the exercise of the option by the option holder and may lose the
benefit from any capital appreciation on the underlying security. A number of
factors may influence the option holder’s decision to exercise the option,
including the value of the underlying security, price volatility, dividend yield
and interest rates. To the extent that these factors increase the value of the
call option, the option holder is more likely to exercise the option, which may
negatively affect the Fund. In addition, the Fund’s ability to sell the
securities underlying the options will be limited while the options are in
effect unless the Fund cancels out the option position through the purchase of
offsetting identical options prior to the expiration of the written options.
Exchanges may suspend the trading of options in volatile markets which may
prohibit the Fund from writing options at times the portfolio managers deem
advisable.
CURRENT
MARKET CONDITIONS RISK.
Current market conditions risk is the risk that a particular investment, or
shares of the Fund in general, may fall in value due to current market
conditions.
As a means to fight
inflation, which remains at elevated levels, the Federal Reserve and certain
foreign central banks have raised interest rates, and the
Federal Reserve has begun the process to reverse previously implemented
quantitative easing. U.S. regulators have proposed several changes to market and
issuer regulations which would directly impact the Fund. While it is hard to
predict whether any of these regulations will be adopted, due to the current
scope of proposed regulations, any regulatory changes could adversely impact the
Fund’s ability to achieve its investment strategies or make certain investments.
Regulatory changes may also increase Fund operational costs, which could impact
overall performance. Certain market factors may result in central banks changing
their approach in the future. Recent and potential future bank failures could
result in disruption to the broader banking industry or markets generally and
reduce confidence in financial institutions and the economy as a whole, which
may also heighten market volatility and reduce liquidity.
The ongoing
adversarial political climate in the United States, as well as political and
diplomatic events both domestic and abroad, such as presidential,
congressional and gubernatorial elections in the U.S., global elections and
governmental changes and the U.S. government’s failure to agree on a long-term
budget and deficit reduction plan, have and may continue to have an adverse
impact on the U.S. regulatory landscape, markets and investor behavior, which
could have a negative impact on the Fund’s investments and operations. The
potential result of a U.S. federal government shutdown may also significantly
impact investor and consumer behavior, which may adversely impact the markets
and global economy. Global and domestic authorities and regulators have
previously responded to serious economic disruptions with ranging fiscal and
monetary policy changes, including but not limited to, direct capital infusions
into companies, new monetary programs and dramatically lower interest rates. Any
change in these policies, or the ineffectiveness of these policies, could
increase volatility in securities markets, which may adversely impact the Fund’s
investments and performance. Any market disruptions could also delay the Fund
from making sound investment decisions in a timely manner. If the Fund
concentrates its investments in a region enduring geopolitical market
disruption, it may face higher risk of loss, although the increasing
interconnectivity between global economies and financial markets can lead to
events or conditions in one country, region or financial market adversely
impacting a different country, region or financial market.
Other unexpected
political, regulatory and diplomatic events within the U.S. and abroad may
affect investor and consumer confidence and may adversely impact
financial markets and the broader economy. For example, ongoing armed conflicts
between Russia and Ukraine in Europe and among Israel, Hamas and other militant
groups in the Middle East, have caused and could continue to cause significant
market disruptions and volatility within the markets in Russia, Europe, the
Middle East and the United States. The hostilities and sanctions resulting from
those hostilities have and could continue to have a significant impact on
certain Fund investments as well as Fund performance and liquidity. The
economies of the United States and its trading partners, as well as the
financial markets generally, may be adversely impacted by trade disputes and
other matters. For example, the United States has imposed trade barriers and
restrictions on China. In addition, the Chinese government is engaged in a
longstanding dispute with Taiwan, continually threatening an invasion. If the
political climate between the United States and China does not improve or
continues to deteriorate, if China were to attempt invading Taiwan, or if other
geopolitical conflicts develop or worsen, economies, markets and individual
securities may be adversely affected, and the value of the Fund’s assets may go
down. The COVID-19 global pandemic, or any future public health crisis, and the
ensuing policies enacted by governments and central banks have caused and may
continue to cause significant volatility and uncertainty in global financial
markets, negatively impacting global growth prospects. While vaccines have been
developed, there is no guarantee that
16
vaccines will be
effective against emerging future variants of the disease. As this global
pandemic illustrated, such events may affect certain geographic regions,
countries, sectors and industries more significantly than others.
Advancements in
technology may also adversely impact markets and the overall performance of the
Fund. For instance, the economy may be significantly impacted
by the advanced development and increased regulation of artificial intelligence.
As the use of technology grows, liquidity and market movements may be affected.
As artificial intelligence is used more widely, the profitability and growth of
Fund holdings may be impacted, which could significantly impact the overall
performance of the Fund.
These events, and
any other future events, may adversely affect the prices and liquidity of the
Fund’s portfolio investments and could result in disruptions in
the trading markets.
CYBER
SECURITY RISK. The Fund is
susceptible to operational risks through breaches in cyber security. A breach in
cyber security refers to both intentional and unintentional events that may
cause the Fund to lose proprietary information, suffer data corruption or lose
operational capacity. Such events could cause the Fund to incur regulatory
penalties, reputational damage, additional compliance costs associated with
corrective measures and/or financial loss. These risks typically are not covered
by insurance. In general, cyber incidents can result from deliberate attacks or
unintentional events. Cyber incidents include, but are not limited to, gaining
unauthorized access to digital systems (e.g., through “hacking”
or malicious software coding) for purposes of misappropriating assets or
sensitive information, corrupting data or causing operational disruption. Cyber
attacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make
network services unavailable to intended users). Cyber security failures by or
breaches of the systems of the Advisor, distributor and other service providers
(including, but not limited to, sub-advisors, index providers, fund accountants,
custodians, transfer agents and administrators), market makers, authorized
participants or the issuers of securities in which the Fund invests, have the
ability to cause disruptions and impact business operations, potentially
resulting in: financial losses; interference with the Fund’s ability to
calculate its net asset value; disclosure of confidential trading information;
impediments to trading; submission of erroneous trades or erroneous creation or
redemption orders; the inability of the Fund or its service providers to
transact business; violations of applicable privacy and other laws; regulatory
fines penalties, reputational damage, reimbursement or other compensation costs;
or additional compliance costs. Substantial costs may be incurred by the Fund in
order to resolve or prevent cyber incidents in the future. While the Fund has
established business continuity plans in the event of, and risk management
systems to prevent, such cyber attacks, there are inherent limitations in such
plans and systems, including the possibility that certain risks have not been
identified and that prevention and remediation efforts will not be successful.
Furthermore, the Fund cannot control the cyber security plans and systems put in
place by service providers to the Fund, issuers in which the Fund invests,
market makers or authorized participants. However, there is no guarantee that
such efforts will succeed, and the Fund and its shareholders could be negatively
impacted as a result.
DERIVATIVES
RISK. The use of
derivative instruments involves risks different from, or possibly greater than,
the risks associated with investing directly in securities and other traditional
investments. These risks include: (i) the risk that the counterparty to a
derivative transaction may not fulfill its contractual obligations; (ii) risk of
mispricing or improper valuation; and (iii) the risk that changes in the value
of the derivative may not correlate perfectly with the underlying asset.
Derivative prices are highly volatile and may fluctuate substantially during a
short period of time. Such prices are influenced by numerous factors that affect
the markets, including, but not limited to: changing supply and demand
relationships; government programs and policies; national and international
political and economic events, changes in interest rates, inflation and
deflation and changes in supply and demand relationships. Trading derivative
instruments involves risks different from, or possibly greater than, the risks
associated with investing directly in securities. Derivative contracts
ordinarily have leverage inherent in their terms. The use of leverage may also
cause the Fund to liquidate portfolio positions when it would not be
advantageous to do so. The use of leveraged derivatives can magnify potential
for gain or loss and, therefore, amplify the effects of market volatility on
share price.
DISTRIBUTION
TAX RISK. The Fund
currently expects to make distributions on a regular basis. While the Fund will
normally pay its income as distributions, the Fund's distributions may exceed
the Fund's income and gains for the Fund's taxable year. The Fund may be
required to reduce its distributions if it has insufficient income.
Additionally, there may be times the Fund needs to sell securities when it would
not otherwise do so in order to settle an option position, which could result in
the distribution of premium from that option position being classified as a
return of capital. This occurs because while the distribution consisted of the
premium received from the sale of the call option, the Fund later sold
securities to generate proceeds to settle that call option. Distributions in
excess of the Fund's current and accumulated earnings and profits will be
treated as a return of capital. Distributions in excess of the Fund's minimum
distribution requirements, but not in excess of
17
the Fund's earnings
and profits, will be taxable to Fund shareholders and will not constitute
nontaxable returns of capital. A return of capital distribution
generally will not be taxable but will reduce the shareholder's cost basis and
will result in a higher capital gain or lower capital loss when those Fund
shares on which the distribution was received are sold. Once a Fund
shareholder's cost basis is reduced to zero, further distributions will be
treated as capital gain, if the Fund shareholder holds shares of the Fund as
capital assets. Additionally, any capital returned through distributions will be
distributed after payment of Fund fees and expenses. Because the Fund's
distributions may consist of return of capital, the Fund may not be an
appropriate investment for investors who do not want their principal investment
in the Fund to decrease over time or who do not wish to receive return of
capital in a given period. In the event that a shareholder purchases shares of
the Fund shortly before a distribution by the Fund, the entire distribution may
be taxable to the shareholder even though a portion of the distribution
effectively represents a return of the purchase price.
The Fund’s
investment strategy may limit its ability to distribute dividends eligible for
treatment as qualified dividend income, which for non-corporate shareholders
are subject to federal income tax at rates of up to 20%. The Fund’s investment
strategy may also limit its ability to distribute dividends eligible for the
dividends-received deduction for corporate shareholders. For these reasons, a
significant portion of distributions received by Fund shareholders may be
subject to tax at effective tax rates that are higher than the rates that would
apply if the Fund were to engage in a different investment
strategy.
DIVIDENDS
RISK.
The Fund invests in dividend-paying securities. The Fund’s investment in
dividend-paying securities could cause the Fund to underperform similar funds
that invest without consideration of an issuer’s track record of paying
dividends. Companies that issue dividend-yielding securities are not required to
continue to pay dividends on such securities. Therefore, there is the
possibility that such companies could reduce or eliminate the payment of
dividends in the future especially if the companies are facing an economic
downturn, which could negatively affect the Fund’s
performance.
EQUITY
SECURITIES RISK. The value of the
Fund’s shares will fluctuate with changes in the value of the equity securities
in which it invests.
Equity
securities prices fluctuate for several reasons, including changes in investors'
perceptions of the financial condition of an issuer or the general condition of
the relevant equity market, such as market volatility, or when political or
economic events affecting the issuers occur. Common stock prices may be
particularly sensitive to rising interest rates, as the cost of capital rises
and borrowing costs increase. Equity securities may decline significantly in
price over short or extended periods of time, and such declines may occur in the
equity market as a whole, or they may occur in only a particular country,
company, industry or sector of the market. Additionally, holders of an issuer's
common stock may be subject to greater risks than holders of its preferred stock
and debt securities because common stockholders' claims are subordinated to
those of holders of preferred stocks and debt securities upon the bankruptcy of
an issuer.
INDEX
CONCENTRATION RISK. The
Fund will be concentrated in an industry or a group of industries to the extent
that the Index is so concentrated. To the extent that the Fund invests a
significant percentage of its assets ina 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 significant
exposure makes the Fund more susceptible to any single occurrence and may
subject the Fund to greater market risk than a fund that is more broadly
diversified. There may be instances in which the Index, for a variety of reasons
including changes in the prices of individual securities held by the Index, has
a larger exposure to a small number of stocks or a single stock relative to the
rest of the stocks in the Index. Under such circumstances, the Fund will not
deviate from the Index except in rare circumstances or in an immaterial way and
therefore the Fund’s returns would be more greatly influenced by the returns of
the stock(s) with the larger exposure.
INDEX
OR MODEL CONSTITUENT RISK. The Fund may be a
constituent of one or more indices or ETF models. As a result, the Fund may be
included in one or more index-tracking ETFs or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving
the Fund's shares, the size of the Fund and the market volatility of the Fund’s
shares. Inclusion in an index could increase demand for the Fund and removal
from an index could result in outsized selling activity in a relatively short
period of time. As a result, the Fund’s net asset value could be negatively
impacted and the Fund’s market price may be below the Fund’s net asset value
during certain periods. In addition, index rebalances may potentially result in
increased trading activity. To the extent buying or selling activity increases,
the Fund can be exposed to increased brokerage costs and adverse tax
consequences and the market price of the Fund can be negatively
affected.
INDEX
PROVIDER RISK. There is no
assurance that the Index Provider, or any agents that act on its behalf, will
compile the Index accurately, or that the Index will be determined, maintained,
constructed, reconstituted, rebalanced, composed, calculated or disseminated
accurately. The Index Provider and its agents do not provide any representation
or warranty in relation to the quality, accuracy or completeness of data in the
Index, and do not guarantee that the Index will be calculated in accordance with
its stated methodology. The Advisor’s mandate as described in this prospectus is
to manage the Fund
18
consistently with
the Index provided by the Index Provider. The Advisor relies upon the Index
provider and its agents to accurately compile, maintain,
construct, reconstitute, rebalance, compose, calculate and disseminate the Index
accurately. Therefore, losses or costs associated with any Index Provider or
agent errors generally will be borne by the Fund and its shareholders. To
correct any such error, the Index Provider or its agents may carry out an
unscheduled rebalance of the Index or other modification of Index constituents
or weightings. When the Fund in turn rebalances its portfolio, any transaction
costs and market exposure arising from such portfolio rebalancing will be borne
by the Fund and its shareholders. Unscheduled rebalances also expose the Fund to
additional tracking error risk. Errors in respect of the quality, accuracy and
completeness of the data used to compile the Index may occur from time to time
and may not be identified and corrected by the Index Provider for a period of
time or at all, particularly where the Index is less commonly used as a
benchmark by funds or advisors. For example, during a period where the Index
contains incorrect constituents, the Fund tracking the Index would have market
exposure to such constituents and would be underexposed to the Index’s other
constituents. Such errors may negatively impact the Fund and its shareholders.
The Index Provider and its agents rely on various sources of information to
assess the criteria of issuers included in the Index, including information that
may be based on assumptions and estimates. Neither the Fund nor the Advisor can
offer assurances that the Index’s calculation methodology or sources of
information will provide an accurate assessment of included issuers. Unusual
market conditions or issuer-specific events may cause the Index Provider to
postpone a scheduled rebalance, exclude or substitute a security in the Index or
undertake other measures which could cause the Index to vary from its normal or
expected composition. The postponement of a scheduled rebalance in a time of
market volatility could mean that constituents that would otherwise be removed
at rebalance due to changes in market capitalizations, issuer credit ratings, or
other reasons may remain, causing the performance and constituents of the Index
to vary from those expected under normal conditions. Apart from scheduled
rebalances, the Index Provider or its agents may carry out additional ad hoc
rebalances to the Index due to unusual market conditions or in order, for
example, to correct an error in the selection of index
constituents.
INDUSTRIALS
COMPANIES RISK. The Fund may invest
significantly in industrials companies. The value of securities issued by
industrials companies may be adversely affected by supply and demand related to
their specific products or services and industrials sector products in general.
The products of manufacturing companies may face obsolescence due to rapid
technological developments and frequent new product introduction. World events
and changes in government regulations, import controls, economic conditions and
exchange rates may adversely affect the performance of companies in the
industrials sector. Industrials companies may be adversely affected by liability
for environmental damage and product liability claims. Industrials companies may
also be adversely affected by changes or trends in commodity prices, which may
be influenced by unpredictable factors. Industrials companies, particularly
aerospace and defense companies, may also be adversely affected by government
spending policies because companies in this sector tend to rely to a significant
extent on government demand for their products and services.
INFLATION
RISK.
Inflation risk is the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the present value of the Fund’s assets and distributions
may decline. This risk is more prevalent with respect to debt securities held by
the Fund. Inflation creates uncertainty over the future real value (after
inflation) of an investment. Inflation rates may change frequently and
drastically as a result of various factors, including unexpected shifts in the
domestic or global economy, and the Fund’s investments may not keep pace with
inflation, which may result in losses to Fund investors.
LARGE
CAPITALIZATION COMPANIES RISK. The Fund invests in
the securities of large capitalization companies. Large capitalization companies
may grow at a slower rate and be less able to adapt to changing market
conditions than smaller capitalization companies. Thus, the return on investment
in securities of large capitalization companies may be less than the return on
investment in securities of small and/or mid capitalization companies. The
performance of large capitalization companies also tends to trail the overall
market during different market cycles.
LEVERAGE
RISK.
The Fund has exposure to instruments subjecting them to leverage risk. Leverage
may result in losses that exceed the amount originally invested and may
accelerate the rates of losses. Leverage tends to magnify, sometimes
significantly, the effect of any increase or decrease in the Fund’s exposure to
an asset or class of assets and may cause the value of the Fund’s portfolio and
the Fund’s shares to be volatile and sensitive to market swings. Certain
instruments have the potential for unlimited loss, regardless of the size of the
initial investment.
LIQUIDITY
RISK. The Fund may have
investments that it may not be able to dispose of or close out readily at a
favorable time or price (or at all), or at a price approximating the Fund’s
valuation of the investment. For example, certain investments may trade in
limited volume, or may not have an active trading market. Illiquid securities
may trade at a discount from comparable, more liquid investments and may be
subject to wide fluctuations in market value. It may be difficult for the Fund
to value
19
illiquid
securities accurately. The market for certain investments may become illiquid
under adverse market or economic conditions
independent of any specific adverse changes in the conditions of a particular
issuer. If the Fund needed to sell a large block of illiquid securities to meet
shareholder redemption request or to raise cash, these sales could further
reduce the securities’ prices and adversely affect performance of the Fund.
Disposal of illiquid securities may entail registration expenses and other
transaction costs that are higher than those for liquid securities.
MARKET
MAKER RISK. The Fund faces
numerous market trading risks, including the potential lack of an active market
for Fund shares due to a limited number of market markers. Decisions by market
makers or authorized participants to reduce their role or step away from these
activities in times of market stress could inhibit the effectiveness of the
arbitrage process in maintaining the relationship between the underlying values
of the Fund’s portfolio securities and the Fund’s market price. The Fund may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in the
spread between the Fund’s net asset value and the price at which the Fund’s
shares are trading on the Exchange, which could result in a decrease in value of
the Fund’s shares. This reduced effectiveness could result in Fund shares
trading at a discount to net asset value and also in greater than normal
intraday bid-ask spreads for Fund shares.
MARKET
RISK. Market risk is the
risk that a particular investment, or shares of the Fund in general, may fall in
value. Securities are subject to market fluctuations caused by real or perceived
adverse economic, political, and regulatory factors or market developments,
changes in interest rates and perceived trends in securities prices. Shares of
the Fund could decline in value or underperform other investments. In addition,
local, regional or global events such as war, acts of terrorism, market
manipulation, government defaults, government shutdowns, regulatory actions, political
changes, diplomatic developments, the imposition of sanctions and other
similar measures, spread of infectious diseases or other public health issues,
recessions, natural disasters, or other events could have a significant
negative impact on the Fund and its investments. Any of such circumstances could
have a materially negative impact on the value of the Fund’s shares, the liquidity of an investment, and
may result in increased market volatility. During any such events, the Fund’s
shares may trade at increased premiums or discounts to their net asset
value, the bid/ask spread on the Fund’s
shares may widen and the returns on investment may fluctuate.
NON-CORRELATION
RISK. The Fund’s return
may not match the return of its Index for a number of reasons. The Fund incurs
operating expenses not applicable to its Index and may incur costs in buying and
selling securities, especially when rebalancing the Fund’s portfolio holdings to
reflect changes in the composition of the Index. In addition, the Fund’s
portfolio holdings may not exactly replicate the securities included in its
Index or the ratios between the securities included in the Index. Accordingly,
the Fund's return may underperform the return of the Index.
OPERATIONAL
RISK. The Fund is
subject to risks arising from various operational factors, including, but not
limited to, human error, processing and communication errors, errors of the
Fund’s service providers, counterparties or other third-parties, failed or
inadequate processes and technology or systems failures. The Fund relies on
third-parties for a range of services, including custody. Any delay or failure
relating to engaging or maintaining such service providers may affect the Fund’s
ability to meet its investment objective. Although the Fund and the Fund’s
sub-advisor seek to reduce these operational risks through controls and
procedures, there is no way to completely protect against such
risks.
OPTIONS
RISK. The Fund may
utilize options. The use of options involves investment strategies and risks
different from those associated with ordinary portfolio securities transactions
and depends on the ability of the Fund's portfolio manager to forecast market
movements correctly. The prices of options are influenced by, among other
things, actual and anticipated changes in the value of the underlying
instrument, or in interest or currency exchange rates, including the anticipated
volatility, which in turn are affected by fiscal and monetary policies and by
national and international political and economic events. As the seller (writer) of a call option, the
Fund will lose money if the value of the reference index or security rises above
the strike price and the buyer exercises the option; however, such loss will be partially
offset by any premium received from the sale of the option. As the buyer of a
put or call option, the buyer risks losing the entire premium invested in the
option if the buyer does not exercise the option. The effective use of options
also depends on the Fund's ability to terminate option positions at times deemed
desirable to do so. There is no assurance that the Fund will be able to effect
closing transactions at any particular time or at an acceptable price. In
addition, there may at times be an imperfect correlation between the movement in
values of options and their underlying securities and there may at times not be
a liquid secondary market for certain options. There may be times the Fund needs
to sell securities in order to settle an option position, which could result in
the distribution of premium from that option position being classified as a
return of capital and make the Fund less tax-efficient than other
ETFs. Options may also involve the use of
leverage, which could result in greater price volatility than other
securities.
20
PASSIVE
INVESTMENT RISK. The Fund is not
actively managed. The Fund invests in securities included in or representative
of its Index regardless of investment merit. The Fund generally will not attempt
to take defensive positions in declining markets. In the event that the Index is
no longer calculated, the Index license is terminated or the identity or
character of the Index is materially changed, the Fund will seek to engage a
replacement index.
PORTFOLIO
TURNOVER RISK. The Fund has an
investment strategy that may frequently involve buying and selling portfolio
securities. High portfolio turnover may result in the Fund paying higher levels
of transaction costs, including brokerage commissions, dealer mark-ups and other
costs and may generate greater tax liabilities for shareholders. Portfolio
turnover risk may cause the Fund’s performance to be less than
expected.
PREMIUM/DISCOUNT
RISK.
The market price of the Fund’s shares will generally fluctuate in accordance
with changes in the Fund’s net asset value as well as the relative supply of and
demand for shares on the Exchange. First Trust cannot predict whether shares
will trade below, at or above their net asset value because the shares trade on
the Exchange at market prices and not at net asset value. Price differences may
be due, in large part, to the fact that supply and demand forces at work in the
secondary trading market for shares will be closely related, but not identical,
to the same forces influencing the prices of the holdings of the Fund trading
individually or in the aggregate at any point in time. However, given that
shares can only be purchased and redeemed in Creation Units, and only to and
from broker-dealers and large institutional investors that have entered into
participation agreements (unlike shares of closed-end funds, which frequently
trade at appreciable discounts from, and sometimes at premiums to, their net
asset value), First Trust believes that large discounts or premiums to the net
asset value of shares should not be sustained absent disruptions to the creation
and redemption mechanism, extreme market volatility or potential lack of
authorized participants. During stressed market conditions, the market for the
Fund’s shares may become less liquid in response to deteriorating liquidity in
the market for the Fund’s underlying portfolio holdings, which could in turn
lead to differences between the market price of the Fund’s shares and their net
asset value and the bid/ask spread on the Fund’s shares may
widen.
TAX
RISK. The Fund’s covered
call strategy may limit its ability to distribute dividends eligible for
treatment as qualified dividend income and to distribute dividends eligible for
the dividends-received deduction for corporate shareholders. For these reasons,
a significant portion of income received from the Fund may be subject to tax at
effective tax rates that are higher than the rates that would apply if the Fund
were to engage in a different investment strategy. There may be times the Fund
needs to sell securities in order to settle an option position, which could
result in the distribution of premium from that option position being classified
as a return of capital and make the Fund less tax-efficient than other
ETFs.
TRADING
ISSUES RISK. Trading in Fund
shares on the Exchange may be halted due to market conditions or for reasons
that, in the view of the Exchange, make trading in shares inadvisable. In
addition, trading in Fund shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to the Exchange’s “circuit
breaker” rules. There can be no assurance that the requirements of the Exchange
necessary to maintain the listing of the Fund will continue to be met or will
remain unchanged. The Fund may have difficulty maintaining its listing on the
Exchange in the event the Fund’s assets are small, the Fund does not have enough
shareholders, or if the Fund is unable to proceed with creation and/or
redemption orders.
VALUATION
RISK. The Fund may hold
securities or other assets that may be valued on the basis of factors other than
market quotations. This may occur in times of market turmoil or reduced
liquidity. There are multiple methods that can be used to value a portfolio
holding when market quotations are not readily available. The value established
for any portfolio holding at a point in time might differ from what would be
produced using a different methodology or if it had been priced using market
quotations. Portfolio holdings that are valued using techniques other than
market quotations, including “fair valued” assets or securities, may be subject
to greater fluctuation in their valuations from one day to the next than if
market quotations were used. In addition, there is no assurance that the Fund
could sell or close out a portfolio position for the value established for it at
any time, and it is possible that the Fund would incur a loss because a
portfolio position is sold or closed out at a discount to the valuation
established by the Fund at that time. The Fund’s ability to value investments
may be impacted by technological issues or errors by pricing services or other
third-party service providers.
VOLATILITY
RISK.
Volatility is the characteristic of a security, an index or a market to
fluctuate significantly in price within a short time period. The Fund may invest
in securities or financial instruments that exhibit more volatility than the
market as a whole. Such exposures could cause the Fund’s net asset value to
experience significant increases or declines in value over short periods of
time. Volatility can be caused by many factors, including changes in the economy
or financial markets or for reasons specific to a particular issuer.
21
Non-Principal
Risks
BORROWING
AND LEVERAGE RISK. If the Fund borrows
money, it must pay interest and other fees, which may reduce the Fund’s returns.
Any such borrowings are intended to be temporary. However, under certain market
conditions, including periods of decreased liquidity, such borrowings might be
outstanding for longer periods of time. As prescribed by the 1940 Act, the Fund
will be required to maintain specified asset coverage of at least 300% with
respect to any bank borrowing immediately following such borrowing and at all
times thereafter. The Fund may be required to dispose of assets on unfavorable
terms if market fluctuations or other factors reduce the Fund’s asset coverage
to less than the prescribed amount.
CASH
TRANSACTIONS RISK. The Fund may effect
all or a portion of its creations and redemptions for cash rather than in-kind.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an ETF that effects its creations and redemptions only in-kind.
ETFs are able to make in-kind redemptions and avoid being taxed on gains on the
distributed portfolio securities at the fund level. A Fund that effects
redemptions for cash may be required to sell portfolio securities in order to
obtain the cash needed to distribute redemption proceeds. Any recognized gain on
these sales by the Fund will generally cause the Fund to recognize a gain it
might not otherwise have recognized, or to recognize such gain sooner than would
otherwise be required if it were to distribute portfolio securities only
in-kind. The Fund intends to distribute these gains to shareholders to avoid
being taxed on this gain at the fund level and otherwise comply with the special
tax rules that apply to it. This strategy may cause shareholders to be subject
to tax on gains they would not otherwise be subject to, or at an earlier date
than if they had made an investment in a different ETF. Moreover, cash
transactions may have to be carried out over several days if the securities
market is relatively illiquid and may involve considerable brokerage fees and
taxes. These brokerage fees and taxes, which will be higher than if the Fund
sold and redeemed its shares entirely in-kind, will be passed on to those
purchasing and redeeming Creation Units in the form of creation and redemption
transaction fees. In addition, these factors may result in wider spreads between
the bid and the offered prices of the Fund’s shares than for ETFs that
distribute portfolio securities in-kind. The Fund’s use of cash for creations
and redemptions could also result in dilution to the Fund and increased
transaction costs, which could negatively impact the Fund’s ability to achieve
its investment objective.
FAILURE
TO QUALIFY AS A REGULATED INVESTMENT COMPANY RISK. If, in any year, the Fund fails to
qualify as a regulated investment company under the applicable tax laws, the
Fund would be taxed as an ordinary corporation. In such circumstances, the
Fund's taxable income would be subject to tax at the Fund level and to a further
tax at the shareholder level when such income is distributed and the Fund could
be required to recognize unrealized gains, pay substantial taxes and interest
and make substantial distributions before requalifying as a regulated investment
company that is accorded special tax treatment. This would cause investors to incur
higher tax liabilities than they otherwise would have incurred and would have a
negative impact on Fund returns. If the Fund fails to qualify as a regulated
investment company, distributions to the Fund's shareholders generally would be
eligible (i) for treatment as qualified dividend income in the case of
individual shareholders and (ii) for the dividends received deduction in the
case of corporate shareholders. See "Federal Tax Matters."
INTELLECTUAL
PROPERTY RISK. The Fund relies on a
license and related sublicense that permits the Fund to use its Index and
associated trade names, trademarks and service marks (the “Intellectual
Property”) in connection with
the Fund’s name and investment strategies. Such license and related sublicense
may be terminated by the Index Provider, and, as a result, the Fund may lose its
ability to use the Intellectual Property. There is also no guarantee that the
Index Provider has all rights to license the Intellectual Property for use by
the Fund. Accordingly, in the event the license is terminated or the Index
Provider does not have rights to license the Intellectual Property, it may have
a significant effect on the operation of the Fund.
ISSUER
SPECIFIC CHANGES RISK. The value of an
individual security or particular type of security can be more volatile than the
market as a whole and can perform differently from the value of the market as a
whole.
LEGISLATION/LITIGATION
RISK. From time to time,
various legislative initiatives are proposed in the United States and abroad,
which may have a negative impact on certain companies in which the Fund invests.
In addition, litigation regarding any of the issuers of the securities owned by
the Fund, or industries represented by these issuers, may negatively impact the
value of the securities. Such legislation or litigation may cause the Fund to
lose value or may result in higher portfolio turnover if the Sub-Advisor
determines to sell such a holding.
REIT
RISK. The Fund may invest
in REITs. REITs typically own and operate income-producing real estate, such as
residential or commercial buildings, or real-estate related assets, including
mortgages. As a result, investments in REITs are subject to the risks associated
with investing in real estate, which may include, but are not limited to:
fluctuations in the value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local operating expenses; and
other economic, political or regulatory occurrences affecting companies in the
real estate sector. Additionally, investing in REITs involves certain other
risks related to their structure and focus, which include, but are not limited
to, dependency upon
22
management
skills, limited diversification, the risks of locating and managing financing
for projects, heavy cash flow dependency, possible
default by borrowers, the costs and potential losses of self-liquidation of one
or more holdings, the risk of a possible lack of mortgage funds and associated
interest rate risks, overbuilding, property vacancies, increases in property
taxes and operating expenses, changes in zoning laws, losses due to
environmental damages, changes in neighborhood values and appeal to purchasers,
the possibility of failing to maintain exemptions from registration under the
1940 Act, failure to satisfy the requirements of the Internal Revenue Code of
1986 for maintaining REIT status and, in many cases, relatively small market
capitalization, which may result in less market liquidity and greater price
volatility for a REIT’s shares. REITs are also subject to the risk that the real
estate market may experience an economic downturn generally, which may have a
material effect on the real estate in which the REITs invest and their
underlying portfolio securities.
Fund
Organization
The
Fund is a series of the Trust, an investment company registered under the 1940
Act. The Fund is treated as a separate fund with its own
investment objectives and policies. The Trust is organized as a Massachusetts
business trust. The Board is responsible for the overall management and
direction of the Trust. The Board elects the Trust’s officers and approves all
significant agreements, including those with the Advisor, Sub-Advisor,
distributor, custodian and fund administrative and accounting
agent.
Management
of the Fund
First
Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois 60187, is the
investment advisor to the Fund. In this capacity, First Trust is
responsible for the selection and ongoing monitoring of the securities in the
Fund’s portfolio and certain other services necessary for the management of the
portfolios.
First
Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace
Partners of DuPage L.P. is a limited partnership with one general partner, The
Charger Corporation, and a number of limited partners. The Charger Corporation
is an Illinois corporation controlled by James A. Bowen, the Chief Executive
Officer of First Trust. First Trust discharges its responsibilities subject to
the policies of the Fund.
First Trust serves
as advisor or sub-advisor for 11 mutual fund portfolios, 10
exchange-traded funds consisting of 237 series and 13 closed-end funds. It is
also the portfolio supervisor of certain unit investment trusts sponsored by
First Trust Portfolios L.P. (“FTP”), an affiliate of First Trust, 120
East Liberty Drive, Wheaton, Illinois 60187. FTP specializes in the
underwriting, trading and distribution of unit investment trusts and other
securities. FTP is the principal underwriter of the shares of the
Fund.
The Trust, on behalf
of the Fund, and First Trust have retained Vest Financial LLC ("Vest" or the "Sub-Advisor") to serve as investment sub-advisor
pursuant to a sub-advisory agreement (the "Sub-Advisory
Agreement"). In this
capacity, Vest is responsible for the selection and ongoing monitoring of the
securities in the Fund’s investment portfolio. Vest, with principal offices at
8350 Broad St., Suite 240, McLean, Virginia 22102, was founded in 2012, and is a
Delaware LLC. Vest had approximately $21.7 billion under management or committed
to management as of December 31, 2023.
The Sub-Advisor is a
subsidiary of Vest
Group, Inc. (“VG”). First Trust Capital Partners, LLC
(“FTCP”), an affiliate of First Trust, is
the largest single holder of voting shares in VG.
Karan
Sood and Howard Rubin are the Fund’s portfolio managers and are jointly and
primarily responsible for the day-to-day management of the
Fund’s investment portfolios.
•
Mr. Sood has over ten years of
experience in derivative based investment strategy design and trading. Mr. Sood
joined Vest in June 2012. Prior to joining Vest Mr. Sood worked at ProShares
Advisors LLC. Prior to ProShares, Mr. Sood worked as a Vice President at
Barclays Capital. Last based in New York, he was responsible for using
derivatives to design structured investment strategies and solutions for the
firm’s institutional clients in the Americas. Prior to his role in New York, Mr.
Sood worked in similar capacity in London with Barclays Capital’s European
clients. Mr. Sood received a master’s degree in Decision Sciences &
Operations Research from London School of Economics & Political Science. He
also holds a bachelor’s degree in engineering from the Indian Institute of
Technology, Delhi.
•
Mr. Rubin has over twenty-five years
of experience as a portfolio manager. Mr. Rubin joined Vest in August 2017.
Prior to joining Vest, Mr. Rubin served as Director of Portfolio Management at
ProShares Advisors LLC from December 2007 to September 2013. Mr. Rubin also
served as Senior Portfolio Manager of ProFund Advisors
23
LLC
from November 2004 to December 2007 and Portfolio Manager of ProFund Advisors
LLC from April 2000 through November
2004. Mr. Rubin holds the Chartered Financial Analyst (CFA) designation. Mr.
Rubin received a master’s degree in Finance from George Washington University.
He also holds a bachelor’s degree in economics from Wharton School of Finance,
University of Pennsylvania.
For
additional information concerning First Trust and the Sub-Advisor, including a
description of the services provided to the Fund, see the Fund’s
SAI. Additional information about the portfolio managers’ compensation, other
accounts managed by the portfolio managers and the portfolio managers’ ownership
of shares in the Fund is provided in the SAI.
Management
Fee
Pursuant
to an investment management agreement between First Trust and the Trust, on
behalf of the Fund (the “Investment
Management Agreement”), First Trust
oversees the Sub-Advisor’s management of the Fund’s assets and pays the
Sub-Advisor for its services as Sub-Advisor. First Trust is paid an annual
unitary management fee by the Fund equal to 0.75% of the Fund's average daily
net assets and is responsible for the Fund's expenses, including the cost of
transfer agency, sub-advisory, custody, fund administration, legal, audit and
other services, but excluding fee payments under the Investment Management
Agreement, interest, taxes, brokerage commissions and other expenses connected
with the execution of portfolio transactions, distribution and service fees
payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses.
As
approved by the Trust’s Board of Trustees, the management fee paid to First
Trust will be reduced at certain levels of Fund net assets
(“breakpoints”). See the Fund's
Statement of Additional Information for more information on the
breakpoints.
A discussion
regarding the Board’s approval of the continuation of the Investment Management
Agreement and Investment Sub-Advisory Agreement is available
in the Fund's Annual Report to Shareholders for the fiscal year ended October
31, 2023.
How
to Buy and Sell Shares
Most
investors buy and sell shares of the Fund in secondary market transactions
through brokers. Shares of the Fund are listed for trading on the
secondary market on one or more national securities exchanges. Shares can be
bought and sold throughout the trading day like other publicly traded shares.
There is no minimum investment when buying shares on the Exchange. Although
shares are generally purchased and sold in “round lots” of 100 shares, brokerage
firms typically permit investors to purchase or sell shares in smaller “odd
lots,” at no per-share price differential. When buying or selling shares through
a broker, investors should expect to pay brokerage commissions, investors may
receive less than the net asset value of the shares because shares are bought
and sold at market prices rather than at net asset value, and investors may pay
some or all of the bid-ask spread for each transaction (purchase or sale) of
Fund shares. Share prices are reported in dollars and cents per
share.
Under
normal circumstances, the Fund will pay out redemption proceeds to a redeeming
authorized participant within two days after the
authorized participant’s redemption request is received, in accordance with the
process set forth in the Fund’s SAI and in the agreement between the authorized
participant and the Fund’s distributor. However, the Fund reserves the right,
including under stressed market conditions, to take up to seven days after the
receipt of a redemption request to pay an authorized participant, all as
permitted by the 1940 Act. If the Fund has foreign investments in a country
where a local market holiday, or series of consecutive holidays, or the extended
delivery cycles for transferring foreign investments to redeeming authorized
participants prevents the Fund from delivering such foreign investments to an
authorized participant in response to a redemption request, the Fund may take up
to 15 days after the receipt of the redemption request to deliver such
investments to the authorized participant.
For
purposes of the 1940 Act, the Fund is treated as a registered investment
company, and the acquisition of shares by other registered investment
companies and companies relying on Sections 3(c)(1) or 3(c)(7) of the 1940 Act
is subject to the restrictions of Section 12(d)(1) of the 1940 Act and the
related rules and interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is
the record owner of all outstanding shares of the Fund and is recognized as the
owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all
shares. Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner
24
of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not
considered a registered owner of shares. Therefore, to exercise any right as an
owner of shares, you must rely upon the procedures of DTC and its participants.
These procedures are the same as those that apply to any other stocks that you
hold in book-entry or “street name” form.
Share
Trading Prices
The
trading price of shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and
can be affected by market forces of supply and demand, economic conditions and
other factors.
Frequent
Purchases and Redemptions of the Fund's Shares
The
Fund imposes no restrictions on the frequency of purchases and redemptions
(“market
timing”). In determining not
to approve a written, established policy, the Board evaluated the risks of
market timing activities by the Fund's shareholders. The Board considered that
the Fund's shares can only be purchased and redeemed directly from the Fund in
Creation Units by broker-dealers and large institutional investors that have
entered into participation agreements (i.e., authorized
participants (“APs”)) and that the vast
majority of trading in the Fund's shares occurs on the secondary market. Because
the secondary market trades do not involve the Fund directly, it is unlikely
those trades would cause many of the harmful effects of market timing, including
dilution, disruption of portfolio management, increases in the Fund's trading
costs and the realization of capital gains. With respect to trades directly with
the Fund, to the extent effected in-kind (i.e., for securities),
those trades do not cause any of the harmful effects that may result from
frequent cash trades. To the extent that the Fund may effect the purchase or
redemption of Creation Units in exchange wholly or partially for cash, the Board
noted that such trades could result in dilution to the Fund and increased
transaction costs, which could negatively impact the Fund's ability to achieve
its investment objective. However, the Board noted that direct trading by APs is
critical to ensuring that the shares trade at or close to net asset value. In
addition, the Fund imposes fixed and variable transaction fees on purchases and
redemptions of Creation Units to cover the custodial and other costs incurred by
the Fund in effecting trades. Finally, the Advisor monitors purchase and
redemption orders from APs for patterns of abusive trading and the Fund reserves
the right to not accept orders from APs that the Advisor has determined may be
disruptive to the management of the Fund.
Dividends,
Distributions and Taxes
The Fund has
implemented a distribution policy pursuant to which the Fund intends to declare
and pay monthly dividends to shareholders at an annual rate
that is approximately 8.0% (before fees and expenses) over the current annual
dividend yield of the S&P 500® Index. The Board may amend this
distribution policy at any time, or the Fund may cease distributions entirely,
at any time.
Under the
distribution policy, to the extent that sufficient investment income is not
available on a monthly basis,some or all of the Fund’s distributions could
consist primarily or entirely of return of capital, as discussed below, in order
to maintain the distribution rate. The amount treated as a return of capital
will reduce a shareholder’s cost basis in the shareholder’s shares, thereby
increasing the potential gain or reducing the potential loss on the sale of
shares. Investors should not make any conclusions about the Fund’s investment
performance from the amount of the Fund’s distributions or from the terms of the
Fund’s distribution policy.
The Fund may at
times, in its discretion, pay out less than the entire amount of net investment
income earned in any particular period and may at times pay out such
accumulated undistributed income in addition to net investment income earned in
other periods in order to permit the Fund to maintain a more stable level of
distributions. As a result, the dividend paid by the Fund to shareholders for
any particular period may be more or less than the amount of net investment
income earned by the Fund during such period.
Dividends from net
investment income, if any, are declared and paid monthly by the Fund. The Fund
distributes its net realized capital gains, if any, to shareholders at least
annually.
Distributions
in cash may be reinvested automatically in additional whole shares only if the
broker through whom you purchased shares makes such
option available. Such shares will generally be reinvested by the broker based
upon the market price of those shares and investors may be subject to customary
brokerage commissions charged by the broker.
25
Federal
Tax Matters
This
section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Fund. This section is current as of the
date of this prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state,
local or non-U.S. tax consequences.
This
federal income tax summary is based in part on the advice of counsel to the
Fund. The Internal Revenue Service ("IRS") could disagree with
any conclusions set forth in this section. The following disclosure may not be
sufficient for you to use for the purpose of avoiding penalties under federal
tax law.
As with any
investment, you should seek advice based on your individual circumstances from
your own tax advisor.
Fund
Status
The
Fund intends to qualify as a “regulated investment company” (a “RIC”) under the federal
tax laws. If the Fund qualifies as a RIC and distributes its income as required
by the tax law, the Fund generally will not pay federal income
taxes.
Distributions
The
Fund’s distributions are generally taxable. After the end of each year, you will
receive a tax statement that separates the distributions of the
Fund into two categories: ordinary income distributions and capital gain
dividends.The presence of covered call options in the portfolio may reduce the
amount of dividends that would otherwise be treated as capital gain dividends.
Ordinary income distributions are generally taxed at your ordinary tax rate,
however, as further discussed below certain ordinary income distributions
received from the Fund may be taxed at the capital gains tax rates. Some portion
of the ordinary income distributions that are attributable to dividends received
by the Fund from shares in certain real estate investment trusts may be
designated by the Fund as eligible for a deduction for qualified business
income, provided certain holding period requirements are satisfied. Generally,
you will treat all capital gain dividends as long-term capital gains regardless
of how long you have owned your shares.
To determine your
actual tax liability for your capital gain dividends, you must calculate your
total net capital gain or loss for the tax year after considering all of
your other taxable transactions, as described below. In addition, the Fund may
make distributions that represent a return of capital for tax purposes and thus
will generally not be taxable to you; however, such distributions may reduce
your tax basis in your shares, which could result in you having to pay higher
taxes in the future when shares are sold, even if you sell the shares at a loss
from your original investment. A “return of capital” is a return, in whole or in
part, of the funds that you previously invested in the Fund. A return of capital
distribution should not be considered part of a Fund’s dividend yield or total
return of an investment in Fund shares. The tax status of your distributions
from the Fund is not affected by whether you reinvest your distributions in
additional shares or receive them in cash. The tax laws may require you to treat
distributions made to you in January as if you had received them on December 31
of the previous year.
Income
from the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally
applies to your net investment income if your adjusted
gross income exceeds certain threshold amounts, which are $250,000 in the case
of married couples filing joint returns and $200,000 in the case of single
individuals.
Dividends
Received Deduction
A
corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from RICs. However, certain ordinary income dividends on shares
that are attributable to qualifying dividends received by the Fund from certain
corporations may be reported by the Fund as being eligible for the dividends
received deduction. The presence of covered call options in the portfolio may
reduce the amount of dividends that are treated as qualifying
dividends.
Capital
Gains and Losses and Certain Ordinary Income Dividends
If
you are an individual, the maximum marginal stated federal tax rate for net
capital gain is generally 20% (15% or 0% for taxpayers with
taxable incomes below certain thresholds). Some capital gains, including some
portion of your capital gain dividends may be taxed at a higher maximum stated
tax rate. Capital gain received from assets held for more than one year that is
considered “unrecaptured section 1250 gain” (which may be the case, for example,
with some capital gains attributable to equity interests in real estate
investment trusts that constitute interests in entities treated as real estate
investment trusts for federal income tax purposes) is taxed at a maximum
marginal stated federal tax rate of 25%. In the case of capital gain
26
dividends,
the determination of which portion of the capital gain dividend, if any, is
subject to the 25% tax rate, will be made based on rules
prescribed by the United States Treasury. Capital gains may also be subject to
the Medicare tax described above.
Net
capital gain equals net long-term capital gain minus net short-term capital loss
for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your shares to determine your holding period. However, if you receive a
capital gain dividend from the Fund and sell your shares at a loss after holding
them for six months or less, the loss will be recharacterized as long-term
capital loss to the extent of the capital gain dividend received. The tax rates
for capital gains realized from assets held for one year or less are generally
the same as for ordinary income. The Internal Revenue Code of 1986, as amended,
treats certain capital gains as ordinary income in special
situations.
An
election may be available to you to defer recognition of the gain attributable
to a capital gain dividend if you make certain qualifying
investments within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Ordinary
income dividends received by an individual shareholder from a RIC such as the
Fund are generally taxed at the same rates that apply to
net capital gain (as discussed above), provided certain holding period
requirements are satisfied and provided the dividends are attributable to
qualifying dividends received by the Fund itself. Distributions with respect to
shares in real estate investment trusts and foreign corporations are qualifying
dividends only in limited circumstances. The presence of covered call options in
the portfolio may reduce the amount of dividends that are eligible for capital
gains rates. The Fund will provide notice to its shareholders of the amount of
any distribution which may be taken into account as a dividend which is eligible
for the capital gains tax rates.
Sale
of Shares
If
you sell or redeem your shares, you will generally recognize a taxable gain or
loss. To determine the amount of this gain or loss, you must
subtract your tax basis in your shares from the amount you receive in the
transaction. Your tax basis in your shares is generally equal to the cost of
your shares, generally including brokerage fees, if any. In some cases, however,
you may have to adjust your tax basis after you purchase your shares. An
election may be available to you to defer recognition of capital gain if you
make certain qualifying investments within a limited time. You should talk to
your tax advisor about the availability of this deferral election and its
requirements.
Taxes
on Purchase and Redemption of Creation Units
If
you exchange securities for Creation Units, you will generally recognize a gain
or a loss. The gain or loss will be equal to the difference between
the market value of the Creation Units at the time and your aggregate basis in
the securities surrendered and the cash component paid. If you exchange Creation
Units for securities, you will generally recognize a gain or loss equal to the
difference between your basis in the Creation Units and the aggregate market
value of the securities received and the cash redemption amount. The IRS,
however, may assert that a loss realized upon an exchange of securities for
Creation Units or Creation Units for securities cannot be deducted currently
under the rules governing “wash sales,” or on the basis that there has been no
significant change in economic position.
Treatment
of Fund Expenses
Expenses incurred and
deducted by the Fund will generally not be treated as income taxable to
you.
Non-U.S.
Tax Credit
Because
the Fund may invest in non-U.S. securities, the tax statement that you receive
may include an item showing non-U.S. taxes the Fund paid
to other countries. In this case, dividends taxed to you will include your share
of the taxes the Fund paid to other countries. You may be able to deduct or
receive a tax credit for your share of these taxes.
Non-U.S.
Investors
If
you are a non-U.S. investor (i.e., an investor other
than a U.S. citizen or resident or a U.S. corporation, partnership, estate or
trust), you should be aware that, generally, subject to applicable tax treaties,
distributions from the Fund will be characterized as dividends for federal
income tax purposes (other than dividends which the Fund properly reports as
capital gain dividends) and will be subject to U.S. federal income taxes,
including withholding taxes, subject to certain exceptions described below.
However, distributions received by a non-U.S. investor from the Fund that are
properly reported by the Fund as capital gain dividends may not be subject to
U.S. federal income taxes, including withholding taxes, provided that the Fund
makes certain elections and certain other conditions are met. Distributions from
the Fund that are properly reported by the Fund as an
27
interest-related
dividend attributable to certain interest income received by the Fund or as a
short-term capital gain dividend attributable to
certain net short-term capital gain income received by the Fund may not be
subject to U.S. federal income taxes, including withholding taxes when received
by certain non-U.S. investors, provided that the Fund makes certain elections
and certain other conditions are met. For tax years after December 31, 2022,
amounts paid to or recognized by a non-U.S. affiliate that are excluded from tax
under the portfolio interest, capital gain dividends, short-term capital gains
or tax-exempt interest dividend exceptions or applicable treaties, may be taken
into consideration in determining whether a corporation is an “applicable
corporation” subject to a 15% minimum tax on adjusted financial statement
income.
Distributions may be
subject to a U.S. withholding tax of 30% in the case of distributions to (i)
certain non-U.S. financial institutions that have not entered into an agreement
with the U.S. Treasury to collect and disclose certain information and are not
resident in a jurisdiction that has entered into such an agreement with the U.S.
Treasury and (ii) certain other non-U.S. entities that do not provide certain
certifications and information about the entity’s U.S. owners. This withholding
tax is also currently scheduled to apply to the gross proceeds from the
disposition of securities that produce U.S. source interest or
dividends. However,
proposed regulations may eliminate the requirement to withhold on payments of
gross proceeds from dispositions.
It
is the responsibility of the entity through which you hold your shares to
determine the applicable withholding.
Investments
in Certain Non-U.S. Corporations
If
the Fund holds an equity interest in any “passive foreign investment companies”
(“PFICs”), which are
generally certain non-U.S. corporations that receive at least 75% of their
annual gross income from passive sources (such as interest, dividends, certain
rents and royalties or capital gains) or that hold at least 50% of their assets
in investments producing such passive income, the Fund could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its shareholders. The Fund will not be able to
pass through to its shareholders any credit or deduction for such taxes. The
Fund may be able to make an election that could ameliorate these adverse tax
consequences. In this case, the Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, the Fund might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax. Dividends paid by PFICs are not treated as qualified dividend
income.
Distribution
Plan
FTP
serves as the distributor of Creation Units for the Fund on an agency basis. FTP
does not maintain a secondary market in shares.
The
Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. In accordance with the Rule 12b-1 plan, the
Fund is authorized to pay an amount up to 0.25% of its average daily net assets
each year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional
services.
The Fund does not
currently pay 12b-1 fees, and pursuant to a contractual arrangement, the Fund
will not pay 12b-1 fees any time before March 31, 2025.
However, in the event 12b-1 fees are charged in the future, because these fees
are paid out of the Fund's assets, over time these fees will increase the cost
of your investment and may cost you more than certain other types of sales
charges.
Net
Asset Value
The Fund’s net asset value (“NAV”) is determined as of the close of
regular trading (normally 4:00 p.m., Eastern Time) on each day the New York
Stock Exchange (“NYSE”) is open for trading. If the NYSE
closes early on a valuation day, the Fund’s NAV will be determined as of that time.
The Fund’s NAV is calculated by dividing the value of
the net assets of the Fund (i.e., the value of its total assets less
total liabilities) by the total number of outstanding shares of the Fund, generally rounded to the
nearest cent.
28
Section 2(a)(41) of the 1940 Act provides that when a
market quotation is readily available for a fund’s portfolio investment, it must
be valued at the market value. Rule 2a-5 under the 1940 Act (“Rule
2a-5”) defines a readily available market
quotation as “a quoted price (unadjusted) in active markets for identical investments that the
fund can access at the measurement date, provided that a quotation will not be
readily available if it is not reliable.” If a market quotation is
not
“readily
available,” then the portfolio investment must be
fair valued as determined in good faith by a fund’s board of
trustees.
Rule 2a-5 permits a
fund’s board of trustees to designate the fund’s investment adviser as its
“valuation designee” to perform fair value determinations, subject to
certain conditions. Accordingly, the Fund’s Board has designated First Trust as
its valuation designee (the “Valuation
Designee”) pursuant to
Rule 2a-5 and has directed the Valuation Designee to perform the functions
required in Rule 2a-5(a) subject to the requirements of Rule 2a-5(b) on behalf
of all portfolio investments of the Fund, subject to the Board’s oversight.
First Trust has established a pricing committee (the “Pricing
Committee”) to assist in
the administration of the duties of the Valuation Designee. The Valuation
Designee has adopted valuation procedures for the First Trust Funds (the
“Valuation
Procedures”), a brief
summary of which is set forth below.
The Pricing
Committee has identified certain portfolio investments that are routinely
categorized as having a readily available market quotation. The market value of
an investment with a readily available market quotation is typically determined
on the basis of official closing prices or last reported sale prices or
equivalent price, although this can vary based on investment type and/or the
availability of such prices.
The Pricing
Committee has also identified certain portfolio investments that are routinely
categorized as fair valued investments. In general, for such investments, the
Fund’s accounting agent will obtain all pricing data for use in valuing such
investments from a pricing service provider approved by the Pricing Committee
(each, a “Pricing Service
Provider”), subject to
the oversight of the Pricing Committee. Pricing Service Providers typically
value non-exchange-traded instruments utilizing a range of market-based inputs
and assumptions. For example, when available, Pricing Service Providers may
utilize inputs such as benchmark yields, reported trades, broker-dealer quotes,
spreads, and transactions for comparable instruments. In pricing certain
instruments, a Pricing Service Provider may consider information about an
instrument’s issuer or market activity. Pricing Service Provider valuations of
non-exchange-traded instruments generally represent the service’s good faith
opinion as to what the holder of an instrument would receive in an orderly
transaction for an institutional round lot position under current market
conditions. Certain exchange-traded options, such as FLEX Options, are typically
valued using a model-based price provided by a Pricing Service
Provider.
Portfolio
investments trading on foreign exchanges or over-the-counter markets that close
prior to the close of the NYSE may be fair valued using a systematic
fair valuation model provided by a Pricing Service Provider. If these foreign
securities meet certain criteria in relation to the valuation model, their
valuation is systematically adjusted to reflect the impact of movement in the
U.S. market after the close of certain foreign markets.
If
no price is available from a Pricing Service Provider or if the Pricing Committee
has reason to question the accuracy or the reliability of a price supplied for a
portfolio investment or the use of amortized
cost, the Pricing Committee will determine the fair
value of such portfolio investment in a manner that it believes most
appropriately reflects the fair value of the portfolio investment on the
valuation date (a “Special Fair
Value Pricing Situation”). In a Special Fair Value Pricing
Situation, the Pricing Committee will determine
a fair value price subject to the process outlined in the Valuation Procedures
and based on a consideration of all available information to the Pricing
Committee at the time of the determination.
Additionally, for
foreign securities, if an extraordinary market event occurs between the time the
last “current” market quotation is available for a security in the
Fund’s portfolio and the time the Fund’s NAV is determined that calls into doubt
whether that earlier market quotation represents fair value at the time the
Fund’s NAV is determined, the Pricing Committee will determine the fair
valuation as set forth in the Valuation Procedures.
Fair value represents a good faith approximation
of the value of a portfolio investment and is the amount the Fund might
reasonably expect to receive from the current sale of that investment in an arm’s-length
transaction. Valuing the Fund’s investments using
fair value pricing will result in prices that may differ from current market
valuations, if any, and that may not be the
prices at which those investments could have been sold
during the period in which the particular fair values were used. While the Valuation Procedures and
Valuation Designee’s processes are intended to result in the Fund’s NAV
calculation that fairly reflects the values as of the time of
pricing, the fair value determined for a
portfolio instrument may be materially different from the value that could be
realized upon the sale of that instrument.
29
Foreign currencies
are translated into U.S. dollars at the exchange rate of such currencies against
the U.S. dollar as provided by a Pricing Service Provider. All
assets denominated in foreign currencies will be converted into U.S. dollars at
the exchange rates in effect at the time of valuation.
Fund
Service Providers
The Bank of New York
Mellon, 240 Greenwich Street, New York, New York 10286, acts as the
administrator, custodian and fund accounting and transfer agent
for the Fund. Chapman and Cutler LLP, 320 South Canal St., Chicago, Illinois
60606, serves as legal counsel to the Fund. First Trust serves as the fund
reporting agent for the Fund.
Index
Provider
The
Index is compiled by the Index Provider. The Index Provider is not affiliated
with the Fund, FTP or First Trust. The Fund is entitled to use
the Index pursuant to a sublicensing arrangement by and among the Fund, Index
Provider, First Trust and FTP, which in turn has a license agreement with the
Index Provider. The Index Provider, or its agent, also serves as the index
calculation agent for the Index. The index calculation agent intends to
calculate and disseminate the values of the Index at least once every 15
seconds.
Disclaimers
First
Trust does not guarantee the accuracy and/or the completeness of the Index or
any data included therein, and First Trust shall have no
liability for any errors, omissions or interruptions therein. First Trust makes
no warranty, express or implied, as to results to be obtained by the Fund,
owners of the shares of the Fund or any other person or entity from the use of
the Index or any data included therein. First Trust makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or fitness
for a particular purpose or use with respect to the Index or any data included
therein. Without limiting any of the foregoing, in no event shall First Trust
have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits) arising out of matters relating to the use of
the Index, even if notified of the possibility of such
damages.
The
Index and the methodology used to calculate the Index are the property of Cboe.
Among other things, the methodology involves the S&P
500 Index. S&P® is a registered
trademark of Standard & Poor’s Financial Services LLC (“S&P”), a division of
S&P Global; Cboe® is a registered
trademark of Cboe. The Index, S&P, and Cboe trademarks have been licensed
for use by the Sub-Advisor, and in turn, sub-licensed by the Advisor, including
for use by the Fund. The Fund is not sponsored, endorsed, sold, or promoted by
Cboe and/or its affiliates (the “Cboe
Group”),
or S&P and/or its affiliates (together, the “S&P
Group”).
Neither the Cboe Group nor the S&P Group make any representation regarding
the advisability of investing in the Fund. Neither the Cboe Group nor the
S&P Group guarantees the adequacy, accuracy, timeliness, and/or completeness
of the Index, S&P 500® Index, or any
methodology or data related thereto, and neither the Cboe Group nor the S&P
Group shall have any liability for any errors, omissions, or interruptions
therein. Neither the Cboe Group nor the S&P Group make any representation or
warranty, express or implied, to the owners of Shares or to any member of the
public regarding the advisability of investing in any securities (such as FLEX
options) or in the Fund, or that the Index will track general stock market
performance. Indexes and trademarks owned and operated by S&P Dow Jones
Indices, LLC (“SPDJI”) are licensed for
use by the Cboe Group and the Sub-Advisor, and in turn, sub-licensed by the
Advisor, in connection with derivative indexes such as the Index and in
connection with investment products such as the Fund, and SPDJI receives a fee
for such use. Cboe will receive fees from the Fund in connection with the Fund’s
investment, if any, in FLEX options and other securities purchased and sold on
the Cboe Group exchanges. The Index and S&P 500® Index are determined
without regard to the Fund and the Advisor or Sub-Advisor, and neither Cboe nor
SPDJI have any obligation to take the needs of the Fund, the Advisor or
Sub-Advisor, or the owners of Shares into consideration in determining,
composing, or calculating the Index or S&P 500® Index; the Index and
S&P 500®
Index
are determined without regard to any such needs. Neither the Cboe Group nor the
S&P Group are responsible for or have participated in the determination of
the prices or amount of Shares, the timing of the issuance or sale of Shares, or
the determination or calculation of the equation by which Shares are to be
converted into cash, surrendered, or redeemed, as the case may be. Neither the
Cboe Group nor the S&P Group have any obligation or liability in connection
with the administration, marketing, or trading of Shares. There is no assurance
that the Fund or any other investment product based on the Index will accurately
track the performance of the Index or provide positive investment returns.
Neither Cboe nor SPDJI is an investment adviser. Inclusion of a security within
the Index or S&P 500® Index is not a
recommendation by SPDJI or Cboe to buy, sell, or hold such security, nor is it
investment advice.
30
NEITHER
THE CBOE GROUP NOR THE S&P GROUP GUARANTEES THE ADEQUACY, ACCURACY,
TIMELINESS, AND/OR COMPLETENESS OF THE
INDEX, S&P 500® INDEX, OR ANY
METHODOLOGY OR DATA RELATED THERETO, OR ANY COMMUNICATION, INCLUDING BUT NOT
LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATION)
WITH RESPECT THERETO, AND NEITHER THE CBOE GROUP NOR THE S&P GROUP SHALL BE
SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS
THEREIN. NEITHER THE CBOE GROUP NOR THE S&P GROUP MAKE ANY EXPRESS OR
IMPLIED WARRANTIES, AND EACH HEREBY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND USE, AND AS TO RESULTS TO BE OBTAINED BY
THE ADVISOR OR SUB-ADVISOR, INVESTORS IN THE FUND, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE INDEX, S&P 500® INDEX, OR ANY
METHODOLOGY OR DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN
NO EVENT WHATSOEVER SHALL THE CBOE GROUP OR THE S&P GROUP BE LIABLE FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT
NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, OR LOST TIME OR GOODWILL, EVEN
IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN
CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P AND CBOE OR THE
ADVISOR OR SUB-ADVISOR, OTHER THAN THEIR RESPECTIVE AFFILIATES.
Premium/Discount
Information
Information
showing the number of days the market price of the Fund’s shares was greater (at
a premium) and less (at a discount) than the Fund’s net
asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter),
is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
31
Financial
Highlights
As a result of the
Reorganization, the financial highlights information for the Fund is the
financial history of the Predecessor Fund from its inception on March 26,
2018 until March 1, 2021, when the Reorganization was effectuated. Financial
highlights for periods beginning after March 1, 2021 represent the Fund's
performance. The financial highlights table is intended to help you understand
the Fund’s financial performance for the periods shown. Certain information
reflects financial results for a single share of the Fund. The total returns
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
information for the fiscal periods ended October 31, 2019 and October 31, 2020
has been audited by another independent registered public accounting firm. The
information for the periods ended October 31, 2021, October 31, 2022 and October 31, 2023
has been derived from financial statements audited by Deloitte & Touche LLP,
whose report, along with the Fund’s financial statements, is included in the
Fund's Annual Report to Shareholders dated October 31, 2023 and is incorporated
by reference in the Fund’s SAI, which is available upon
request.
First
Trust Exchange-Traded Fund IV
Financial
Highlights
For a share outstanding throughout each period
For a share outstanding throughout each period
FT Vest S&P
500® Dividend
Aristocrats Target Income ETF® (KNG)
|
|
Year
Ended October 31, | ||||
|
|
2023 |
2022 |
2021 |
2020 |
2019 |
|
Net
asset value, beginning of period |
$50.28 |
$54.77 |
$42.40 |
$44.69 |
$40.28 |
|
Income
from investment operations: |
|
|
|
|
|
|
Net
investment income (loss) |
0.86
(a) |
0.81 |
0.73 |
0.81
(a) |
0.74
(a) |
|
Net
realized and unrealized gain (loss) |
(0.94
) |
(3.28
) |
13.57 |
(1.35
)(b) |
5.52 |
|
Total
from investment operations |
(0.08
) |
(2.47
) |
14.30 |
(0.54
) |
6.26 |
|
Distributions
paid to shareholders from: |
|
|
|
|
|
|
Net
investment income |
(2.10
) |
(1.45
) |
(0.58
) |
(1.75
) |
(1.57
) |
|
Net
realized gains |
(0.74
) |
(0.57
) |
(1.35
) |
___ |
(0.29
) |
|
Total
distributions |
(2.84
) |
(2.02
) |
(1.93
) |
(1.75
) |
(1.86
) |
|
Capital
share transactions: |
|
|
|
|
|
|
Transaction
fees |
___ |
___ |
___ |
0.00
(a)(c) |
0.01
(a) |
|
Net
asset value, end of period |
$47.36 |
$50.28 |
$54.77 |
$42.40 |
$44.69 |
|
Total
return (d) |
(0.43
)% |
(4.52
)% |
34.14
% |
(0.93
)% |
15.98
% |
|
Ratios/Supplemental
data: |
|
|
|
|
|
|
Net assets
at end of period (000’s) |
$1,459,956 |
$506,568 |
$294,415 |
$66,778 |
$43,574 |
|
Ratios
to average net assets: |
|
|
|
|
|
|
Ratio of
total expenses to average net assets |
0.75
% |
0.75
% |
0.75
% |
0.75
% |
0.75
% |
|
Ratio of
net investment income (loss) to average net assets |
1.69
% |
1.55
% |
1.65
% |
1.89
% |
1.75
% |
|
Portfolio
turnover rate (e) |
92
% |
55
% |
62
% |
86
% |
83
% |
(a)
Based on
average shares outstanding.
(b)
Realized and
unrealized gains (losses) per share are balancing amounts necessary to reconcile
the change in net asset value per share for the period and may not reconcile
with the aggregate gains and losses in the Statement of Operations due to share
transactions for the period.
(c)
Amount is less
than $0.01.
(d)
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.
(e)
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.
32
Other
Information
Continuous
Offering
The
Fund issues, on a continuous offering basis, its shares in one or more groups of
a fixed number of Fund shares (each such group of such
specified number of individual Fund shares, a “Creation
Unit Aggregation”). The method by
which Creation Unit Aggregations of Fund shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of shares are issued and sold by the Fund on an ongoing basis, a
“distribution,” as such term is used in the Securities Act, may occur at any
point. Broker-dealers and other persons are cautioned that some activities on
their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an
order with FTP, breaks them down into constituent shares and sells such shares
directly to customers, or if it chooses to couple the creation of a supply of
new shares with an active selling effort involving solicitation of secondary
market demand for shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a characterization
as an underwriter.
Broker-dealer
firms should also note that dealers who are not “underwriters” but are effecting
transactions in shares, whether or not participating
in the distribution of shares, are generally required to deliver a prospectus.
This is because the prospectus delivery exemption in Section 4(a)(3) of the
Securities Act is not available in respect of such transactions as a result of
Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that
dealers who are not underwriters but are participating in a distribution (as
contrasted with ordinary secondary market transactions) and thus dealing with
the shares that are part of an overallotment within the meaning of Section
4(a)(3)(C) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to shares are
reminded that, under the Securities Act Rule 153, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer
in connection with a sale on the Exchange is satisfied by the fact that the
prospectus is available from the Exchange upon request. The prospectus delivery
mechanism provided in Rule 153 is available with respect to transactions on a
national securities exchange, a trading facility or an alternative trading
system.
FTP, or its
affiliates, or a fund or unit investment trust for which FTP or an affiliate
serves as sponsor or investment advisor, may purchase shares of the Fund
through a broker-dealer or other investors, including in secondary market
transactions, and because FTP or its affiliates may be deemed affiliates of the
Fund, the shares are being registered to permit the resale of these shares from
time to time after any such purchase. The Fund will not receive any of the
proceeds from the resale of such shares.
33
|
First
Trust
Exchange-Traded
Fund IV |
FT Vest S&P 500® Dividend Aristocrats Target
Income ETF®
For
More Information
For
more detailed information on the Fund, several additional sources of information
are available to you. The SAI, incorporated by
reference into this prospectus, contains detailed information on the Fund's
policies and operation. Additional information about the Fund's investments is
available in the annual and semi-annual reports to shareholders. In the Fund’s
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund's performance during
the last fiscal year. The Fund's most recent SAI, annual and semi-annual reports
and certain other information are available free of charge by calling the Fund
at (800) 621-1675, on the Fund's website at www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You
may obtain this and other information regarding the Fund, including the SAI and
the Codes of Ethics adopted by First Trust, FTP
and the Trust, directly from the Securities and Exchange Commission (the
"SEC"). Information on
the SEC’s website is free of charge. Visit the SEC’s online EDGAR database at
www.sec.gov. You may also request information regarding the Fund by sending a
request (along with a duplication fee) to the SEC by sending an electronic
request to [email protected].
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC
File #: 333-174332
811-22559