|
First
Trust
Exchange-Traded
Fund |
Prospectus
FT Cboe Vest Gold Strategy Target
Income ETF®
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Ticker
Symbol: |
IGLD |
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Exchange: |
Cboe
BZX |
FT Cboe Vest Gold
Strategy Target Income ETF® (the “Fund”) lists and principally trades its
shares on the 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 blocks of shares
called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund (the “Trust”) and an
actively-managed exchange-traded fund organized as a separate series of a
registered management investment company.
Except
when aggregated in Creation Units, the shares are not redeemable securities of
the Fund.
The
Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
NOT
FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
May 2,
2022
Summary
Information
(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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$ |
$ |
$ |
$ |
Target Income ETF is a registered trademark of Cboe Vest Financial.
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Management
Investment
Advisor
First
Trust Advisors L.P. (“First
Trust”
or the “Advisor”)
Investment
Sub-Advisor
Cboe
VestSM Financial LLC
(“Cboe
Vest” or
the “Sub-Advisor”)
Portfolio
Managers
The
following persons serve as the portfolio managers of the Fund:
•
Karan Sood, Managing
Director of Cboe Vest
•
Howard Rubin,
Managing Director of Cboe 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 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.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), First Trust and First Trust
Portfolios L.P., the Fund’s distributor, may pay the intermediary for the sale
of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other intermediary and your
salesperson to recommend the Fund over another investment. Ask your salesperson
or visit your financial intermediary’s website for more information.
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Additional
Information on the Fund's Investment Objective and Strategies
The
Fund is a series of First Trust Exchange-Traded Fund and is regulated as an
“investment company” under the 1940 Act. The Fund is
actively managed and does not seek to track the performance of an index. The
Fund’s investment objective is non-fundamental and may be changed by the Board
of Trustees of the Trust (the “Board”) without shareholder
approval. Unless an investment policy is identified as being fundamental, all
investment policies included in this prospectus and the Fund’s Statement of
Additional Information (“SAI”) are non-fundamental
and may be changed by the Board without shareholder approval. If there is a
material change to the Fund's principal investment strategies, you should
consider whether the Fund remains an appropriate investment for you. There is no
guarantee that the Fund will achieve its investment objective.
The
Fund 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 Underlying ETF invests more than 25% of its assets in an
industry or group of industries. This restriction does not apply to obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
or securities of other investment companies.
While
it is not expected that the Fund will invest in the securities of other
investment companies, any such investments would be subject to
limitations imposed by the 1940 Act and the related rules and interpretations.
The Fund has adopted a policy that it will not invest in other investment
companies in excess of 1940 Act limits in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
Fund
Investments
Principal
Investments
FLEX
Options
FLEX
Options are customized equity or index option contracts that trade on an
exchange, but provide investors with the ability to customize key
contract terms like exercise prices, styles and expiration dates. FLEX Options
are guaranteed for settlement by the OCC.
The
Fund, through the Subsidiary, will purchase and sell call and put FLEX Options
based on the performance of the Underlying ETF. The FLEX Options
that the Fund will hold through the Subsidiary that reference the Underlying ETF
will give the Fund the right to receive or deliver shares of the Underlying ETF
on the option expiration date at a strike price, depending on whether the option
is a put or call option and whether the Fund purchases or sells the option. The
FLEX Options held by the Fund are European style options, which are exercisable
at the strike price only on the FLEX Option expiration date.
U.S.
Government Securities
The
Fund will generally invest in short-term U.S. government securities, including
those that may be structured as zero coupon securities. U.S.
government securities include U.S. Treasury obligations and securities issued or
guaranteed by various agencies of the U.S. government, or by various
instrumentalities that have been established or sponsored by the U.S.
government. U.S. Treasury obligations are backed by the “full faith and credit”
of the U.S. government. Securities issued or guaranteed by federal agencies and
U.S. government sponsored instrumentalities may or may not be backed by the full
faith and credit of the U.S. government.
Cash
Equivalents and Short-Term Investments
The
Fund may invest in securities with maturities of less than one year or cash
equivalents, or 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 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 temporary defensive strategy when the portfolio
managers believe securities in which the Fund normally invests have elevated
risks due to political or economic factors and in other extraordinary
circumstances. For more information on eligible short-term investments, see the
SAI.
Disclosure
of Portfolio Holdings
The
Fund’s portfolio holdings are available on the Fund's website at
www.ftportfolios.com. A description of the policies and procedures with
respect to the disclosure of the Fund's portfolio securities is included in the
Fund's SAI, which is also available on the Fund's website.
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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.
The
risks of the Fund will result from both the Fund’s direct investments and its
indirect investments made through the Subsidiary.
Accordingly, the risks that result from the Subsidiary’s activities will be
described herein as the Fund’s risks.
Principal
Risks
ABSENCE
OF AN ACTIVE MARKET 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 or authorized
participants. The Fund may rely on a small number of third-party market makers
to provide a market for the purchase and sale of shares and market makers are
under no obligation to make a market in the Fund’s shares. Additionally, only a
limited number of institutions act as authorized participants for the Fund and
only an authorized participant may engage in creation or redemption transactions
directly with the Fund and are not obligated to submit purchase or redemption
orders for Creation Units. 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. Any trading halt or other problem
relating to the trading activity of these market makers or any issues disrupting
the authorized participants’ ability to proceed with creation and/or redemption
orders 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 premium or
discount to net asset value and also in greater than normal intraday bid-ask
spreads for Fund shares.
CASH
TRANSACTIONS RISK. The
Fund will effect some or all of its creations and redemptions for cash rather
than in-kind. As a result, an investment in the Fund may be less tax-efficient
than an investment in an ETF that effects its creations and redemptions only
in-kind. ETFs are able to make in-kind redemptions and avoid being taxed on
gains on the distributed portfolio securities at the fund level. 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.
COMMODITIES
RISK.
Commodity prices can have significant volatility, and exposure to commodities
can cause the value of the Fund’s shares to decline or fluctuate in a rapid and
unpredictable manner. The values of physical commodities may be affected by
changes in overall market movements, real or perceived inflationary trends,
commodity index volatility, changes in interest rates or currency exchange
rates, population growth and changing demographics, international economic,
political and regulatory developments, and factors affecting a particular
region, industry or commodity, such as drought, floods, or other weather
conditions, livestock disease, changes in storage costs, trade embargoes,
competition from substitute products, transportation bottlenecks or shortages,
fluctuations in supply and demand, and tariffs. The commodity markets are
subject to temporary distortions or other disruptions due to, among other
factors, lack of liquidity, the participation of speculators, and government
regulation and other actions.
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
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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. The OCC acts as guarantor and central
counterparty with respect to the FLEX Options. As a result, the ability of the
Fund to meet its objective depends on the OCC being able to meet its
obligations. In the unlikely event that the OCC becomes insolvent or is
otherwise unable to meet its settlement obligations, the Fund could suffer
significant losses.
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 low
margin deposits normally required in trading derivatives, including futures
contracts, permit a high degree of leverage. Accordingly, a relatively small
price movement may result in an immediate and substantial loss. The use of
leverage may also cause the Fund to liquidate portfolio positions when it would
not be advantageous to do so in order to satisfy its obligations or to meet
collateral segregation requirements. The use of leveraged derivatives can
magnify potential for gain or loss and, therefore, amplify the effects of market
volatility on share price.
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FLEX
OPTIONS RISK. Trading
FLEX Options involves risks different from, or possibly greater than, the risks
associated with investing directly in securities. The Fund may experience
substantial downside from specific FLEX Option positions and certain FLEX Option
positions may expire worthless. The FLEX Options are listed on an exchange;
however, no one can guarantee that a liquid secondary trading market will exist
for the FLEX Options. In the event that trading in the FLEX Options is limited
or absent, the value of the Fund's FLEX Options may decrease. In a less liquid
market for the FLEX Options, liquidating the FLEX Options may require the
payment of a premium (for written FLEX Options) or acceptance of a discounted
price (for purchased FLEX Options) and may take longer to complete. A less
liquid trading market may adversely impact the value of the FLEX Options and
Fund shares and result in the Fund being unable to achieve its investment
objective. Less liquidity in the trading of the Fund’s FLEX Options could have
an impact on the prices paid or received by the Fund for the FLEX Options in
connection with creations and redemptions of the Fund’s shares. Depending on the
nature of this impact to pricing, the Fund may be forced to pay more for
redemptions (or receive less for creations) than the price at which it currently
values the FLEX Options. Such overpayment or under collection may impact the
value of the Fund and whether the Fund can satisfy its investment objective.
Additionally, in a less liquid market for the FLEX Options, the liquidation of a
large number of options may more significantly impact the price. A less liquid
trading market may adversely impact the value of the FLEX Options and the value
of your investment. The trading in FLEX Options may be less deep and liquid than
the market for certain other exchange-traded options, non-customized options or
other securities.
Transactions in FLEX
Options are required to be centrally cleared. In a transaction involving FLEX
Options, the Fund's counterparty is the OCC, rather than
a bank or broker. Since the Fund is not a member of the OCC and only members
(“clearing
members”) can
participate directly in the OCC, the Fund will hold its FLEX Options through
accounts at clearing members. Although clearing members guarantee performance of
their clients’ obligations to the OCC, there is a risk that a clearing member
may default. The OCC collects margin, maintains a clearing fund specifically to
mitigate a clearing member default and segregates all customer accounts from a
clearing member’s proprietary accounts, which further acts to protect a clearing
member’s customers from the default of the clearing member. However, there is
still a risk that the assets of the Fund might not be fully protected in the
event of a clearing member’s default. If the Fund's clearing member defaults,
the OCC may transfer customer accounts to another clearing member. The OCC may
also close out positions and convert deposits of the defaulting clearing member
to cash. As a result of this process, the Fund would be limited to recovering
only a pro rata share of all available funds segregated on behalf of the
clearing member’s customers for the relevant account class. Therefore, the Fund
could experience and significant loss in the event of a clearing member’s
default. Additionally, the OCC may be unable to perform its obligations under
the FLEX Options contracts due to unexpected events, which could negatively
impact the value of the Fund.
FLEX
OPTIONS VALUATION RISK.
The FLEX Options held by the Fund will be exercisable at the strike price only
on their expiration date. Prior to the expiration date, the value of the FLEX
Options will be determined based upon market quotations or using other
recognized pricing methods. The FLEX Options are also subject to correlation
risk, meaning the value of the FLEX Options does not increase or decrease at the
same rate as the Underlying ETF (although they generally move in the same
direction) or its underlying securities. The value of the FLEX Options prior to
the expiration date may vary because of factors other than the value of the
Underlying ETF, such as interest rate changes, changing supply and demand,
decreased liquidity of the FLEX Options, a change in the actual and perceived
volatility of the stock market and the Underlying ETF and the remaining time to
expiration. FLEX Option prices may also be highly volatile and may fluctuate
substantially during a short period of time. During periods of reduced market
liquidity or in the absence of readily available market quotations for the
holdings of the Fund, the ability of the Fund to value the FLEX Options becomes
more difficult and the judgment of the Fund's investment adviser (employing the
fair value procedures adopted by the Board of Trustees of the Trust) may play a
greater role in the valuation of the Fund's holdings due to reduced availability
of reliable objective pricing data. Consequently, while such determinations may
be made in good faith, it may nevertheless be more difficult for the Fund to
accurately assign a daily value. Under those circumstances, the value of the
FLEX Options will require more reliance on the investment adviser’s judgment
than that required for securities for which there is an active trading market.
This creates a risk of mispricing or improper valuation of the FLEX Options
which could impact the value paid for shares of the Fund.
INCOME
RISK.
The Fund’s income may decline when interest rates fall. This decline can occur
because the Fund may subsequently invest in lower-yielding securities as debt
securities in its portfolio mature, are near maturity or are called, or the Fund
otherwise needs to purchase additional debt securities. In addition, the Fund’s
income could decline when the Fund experiences defaults on the debt securities
it holds. The Fund's strategy may not provide the level of income sought by the
Fund.
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
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shares.
Inclusion in an index could increase demand for the Fund and removal from an
index could result in outsized selling activity in a
relatively short period of time. As a result, the Fund’s net asset value could
be negatively impacted and the Fund’s market price may be below the Fund’s net
asset value during certain periods. In addition, index rebalances may
potentially result in increased trading activity. To the extent buying or
selling activity increases, the Fund can be exposed to increased brokerage costs
and adverse tax consequences and the market price of the Fund can be negatively
affected.
INFLATION
RISK.
Inflation risk is the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the present value of the Fund’s assets and distributions
may decline. This risk is more prevalent with respect to debt securities held by
the Fund. Inflation creates uncertainty over the future real value (after
inflation) of an investment. Inflation rates may change frequently and
drastically as a result of various factors, including unexpected shifts in the
domestic or global economy, and the Fund’s investments may not keep pace with
inflation, which may result in losses to Fund investors.
INTEREST
RATE RISK. The value of debt
securities held by the Fund will fluctuate in value with changes in interest
rates. In general, debt securities will increase in value when interest rates
fall and decrease in value when interest rates rise. The Fund may be subject to
a greater risk of rising interest rates than would normally be the case due to
the current period of historically low rates and the effect of potential
government fiscal policy initiatives and resulting market reaction to those
initiatives. Interest rate risk is generally lower for shorter term investments
and higher for longer term investments. Duration is a common measure of interest
rate risk. Duration measures a debt security’s expected life on a present value
basis, taking into account the debt security’s yield, interest payments and
final maturity. Duration is a reasonably accurate measure of a debt security’s
price sensitivity to changes in interest rates. The longer the duration of a
debt security, the greater the debt security’s price sensitivity is to changes
in interest rates. Rising interest rates also may lengthen the duration of debt
securities with call features, since exercise of the call becomes less likely as
interest rates rise, which in turn will make the securities more sensitive to
changes in interest rates and result in even steeper price declines in the event
of further interest rate increases. An increase in interest rates could also
cause principal payments on a debt security to be repaid at a slower rate than
expected. This risk is particularly prevalent for a callable debt security where
an increase in interest rates could cause the issuer of that security to not
redeem the security as anticipated on the call date, effectively lengthening the
security’s expected maturity, in turn making that security more vulnerable to
interest rate risk and reducing its market value. When interest rates fall, the
Fund may be required to reinvest the proceeds from the sale, redemption or early
prepayment of a debt security at a lower interest rate.
MANAGEMENT
RISK.
The Fund is subject to management risk because it is an actively managed
portfolio. In managing the Fund’s investment portfolio, the portfolio managers
will apply investment techniques and risk analyses that may not produce the
desired result. There can be no guarantee that the Fund will meet its investment
objective(s), meet relevant benchmarks or perform as well as other funds with
similar objectives.
MARKET
RISK. Market risk is the
risk that a particular security, or shares of the Fund in general, may fall in
value. Securities are subject to market fluctuations caused by such factors as
economic, political, regulatory or market developments, changes in interest
rates and perceived trends in securities prices. Shares of the Fund could
decline in value or underperform other investments due to short-term market
movements or any longer periods during more prolonged market downturns. In
addition, local, regional or global events such as war, acts of terrorism,
spread of infectious diseases or other public health issues, recessions, or
other events could have a significant negative impact on the Fund and its
investments. For example, the coronavirus disease 2019 (COVID-19) global
pandemic and the aggressive responses taken by many governments, including
closing borders, restricting international and domestic travel, and the
imposition of prolonged quarantines or similar restrictions, had negative
impacts, and in many cases severe impacts, on markets worldwide. While the
development of vaccines has slowed the spread of the virus and allowed for the
resumption of reasonably normal business activity in the United States, many
countries continue to impose lockdown measures in an attempt to slow the spread.
Additionally, there is no guarantee that vaccines will be effective against
emerging variants of the disease. As this global pandemic illustrated, such
events may affect certain geographic regions, countries, sectors and industries
more significantly than others. Additionally, in February 2022, Russia invaded
Ukraine which has caused and could continue to cause significant market
disruptions and volatility within the markets in Russia, Europe, and the United
States. The hostilities and sanctions resulting from those hostilities could
have a significant impact on certain Fund investments as well as Fund
performance. These events also adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets. Any of such circumstances could have a materially
negative impact on the value of the Fund’s shares and result in increased market
volatility. During any such events, the Fund’s shares may trade at increased
premiums or discounts to their net asset value and the bid/ask spread on the
Fund’s shares may widen.
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NON-DIVERSIFICATION
RISK.
The Fund is operated in a non-diversified manner. As a “non-diversified” fund,
the Fund may hold a smaller number of portfolio securities than many other funds
and may be more sensitive to any single economic, business, political or
regulatory occurrence than a diversified fund. To the extent the Fund invests in
a relatively small number of issuers due to the high percentage of the Fund’s
assets invested in that security, a decline in the market value of a particular
security held by the Fund may affect its value more than if it invested in a
larger number of issuers. The value of the Fund’s shares may be more volatile
than the values of shares of more diversified funds.
OPERATIONAL
RISK. The Fund is
subject to risks arising from various operational factors, including, but not
limited to, human error, processing and communication errors, errors of the
Fund’s service providers, counterparties or other third-parties, failed or
inadequate processes and technology or systems failures. The Fund relies on
third-parties for a range of services, including custody. Any delay or failure
relating to engaging or maintaining such service providers may affect the Fund’s
ability to meet its investment objective. Although the Fund and the Fund’s
investment advisor seek to reduce these operational risks through controls and
procedures, there is no way to completely protect against such
risks.
PREMIUM/DISCOUNT
RISK. The market price
of the Fund’s shares will generally fluctuate in accordance with changes in the
Fund’s net asset value as well as the relative supply of and demand for shares
on the Exchange. First Trust cannot predict whether shares will trade below, at
or above their net asset value because the shares trade on the Exchange at
market prices and not at net asset value. Price differences may be due, in large
part, to the fact that supply and demand forces at work in the secondary trading
market for shares will be closely related, but not identical, to the same forces
influencing the prices of the holdings of the Fund trading individually or in
the aggregate at any point in time. However, given that shares can only be
purchased and redeemed in Creation Units, and only to and from broker-dealers
and large institutional investors that have entered into participation
agreements (unlike shares of closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net asset
value), First Trust believes that large discounts or premiums to the net asset
value of shares should not be sustained absent disruptions to the creation and
redemption mechanism, extreme market volatility or potential lack of authorized
participants. During stressed market conditions, the market for the Fund’s
shares may become less liquid in response to deteriorating liquidity in the
market for the Fund’s underlying portfolio holdings, which could in turn lead to
differences between the market price of the Fund’s shares and their net asset
value and the bid/ask spread on the Fund’s shares may widen.
SIGNIFICANT
EXPOSURE RISK. To the
extent that the Fund invests a significant percentage of its assets in a single
asset class or industry or sector, an adverse economic, business or political
development that affected a particular asset class, region or industry may
affect the value of the Fund’s investments more than if the Fund were more
broadly diversified. A significant exposure makes the Fund more susceptible to
any single occurrence and may subject the Fund to greater volatility and market
risk than a fund that is more broadly diversified.
SUBSIDIARY
INVESTMENT RISK. The Subsidiary is
not registered under the 1940 Act and is not subject to all of the investor
protections of the 1940 Act. Thus, the Fund, as an investor in the Subsidiary,
will not have all of the protections offered to investors in registered
investment companies. In addition, changes in the laws of the United States
and/or the Cayman Islands, under which the Fund and the Subsidiary is organized,
respectively, could result in the inability of the Fund and/or the Subsidiary to
operate as intended and could negatively affect the Fund and its
shareholders.
TAX
RISK.
The Fund intends to qualify as a “regulated Investment company” (“RIC”), however, the
federal income tax treatment of certain aspects of the proposed operations of
the Fund are not entirely clear. This includes the tax aspects of the Fund's
investment in the Subsidiary, the Subsidiary's options strategy, the possible
application of the “straddle” rules, and various loss limitation provisions of
the Internal Revenue Code of 1986, as amended.
The
Fund intends to treat any income it may derive from FLEX Options on the
Underlying ETF received by the Subsidiary as “qualifying income”
for the rules applicable to RICs. Treasury Regulations provide that income from
a corporation similar to the Subsidiary is qualifying income, if (i) the income
is distributed to the Fund in the same year the Fund is required to recognize
the income or (ii) the income is related to the Fund’s business of investing in
stocks or securities. The Fund intends to cause the Subsidiary to make
distributions that would allow the Fund to meet the first requirement. The Fund
generally will be required to recognize the income of the Subsidiary, regardless
of whether the Fund receives a distribution of the Subsidiary’s income, and this
income would be subject to the distribution requirement for qualification as a
RIC and would be taken into account for purposes of the 4% excise
tax.
If
the Fund did not qualify as a RIC for any taxable year and certain relief
provisions were not available, the Fund’s taxable income would be
subject to tax at the Fund level and to a further tax at the shareholder level
when such income is distributed.
16
This
would cause investors to incur higher tax liabilities than they otherwise would
have incurred and would have a negative impact on Fund
returns.
In 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. From time to time, some or all of the Fund's distributions may
constitute a return of capital. A return of capital to shareholders is a return
of a portion of their original investment in the Fund and does not represent net
income or profit. A return of capital would reduce a shareholder's tax basis in
its shares, which could result in higher taxes when the shareholder sells such
shares. This may cause a shareholder to owe taxes even if it sells shares for
less than the original purchase price of such shares.
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.
UNDERLYING
ETF GOLD RISK. The Fund will have
exposure to gold through its investments (through the Subsidiary) in FLEX
Options on the Underlying ETF, which invests substantially all of its assets in
physical gold bullion. The price of gold bullion can be significantly affected
by international monetary and political developments such as currency
devaluation or revaluation, central bank movements, economic and social
conditions within a country, transactional or trade imbalances, or trade or
currency restrictions between countries. Physical gold bullion has sales
commission, storage, insurance and auditing expenses. Investments in gold
generally may be speculative and subject to greater price volatility than
investments in other types of assets. The price of metals, such as gold, is
related to, among other things, worldwide metal prices and extraction and
production costs. Worldwide metal prices may fluctuate substantially over short
periods of time, and as a result, the Fund’s share price may be more volatile
than other types of investments. There is a risk that some or all of the
Underlying ETF’s gold bars held by its custodian or any subcustodian could be
lost, damaged or stolen. Access to the Underlying ETF’s gold bars could also be
restricted by natural events (such as an earthquake) or human actions (such as a
terrorist attack). Any of these events may adversely affect the operations of
the Underlying ETF and, consequently, an investment based on the value of the
Underlying ETF’s shares. Additionally, the Underlying ETF does not insure its
gold and a loss may be suffered with respect to the Underlying ETF’s gold which
is not covered by insurance and for which no party is liable for
damages.
UNDERLYING
ETF RISK. The Fund
invests in FLEX Options that reference an ETF, which subjects the Fund to
certain of the risks of owning shares of an ETF as well as the types of
instruments in which the Underlying ETF invests. The value of an ETF will
fluctuate over time based on fluctuations in the values of the securities held
by the ETF, which may be affected by changes in general economic conditions,
expectations for future growth and profits, interest rates and the supply and
demand for those securities. In addition, ETFs are subject to absence of an
active market risk, premium/discount risk, tracking error risk and trading
issues risk. Certain options on an ETF may not qualify as "Section 1256
contracts" under Section 1256 of the Code, and disposition of such options will
likely result in short-term or long-term capital gains or losses depending on
the holding period.
UPSIDE
PARTICIPATION RISK. The Fund will
experience less than one-to-one participation in any gains experienced by the
Underlying ETF (e.g. if the Underlying
ETF increases in value by 5%,the Fund should be expected to increase in value,
but by less than 5%, before Fund fees and expenses).This means that if the
Underlying ETF experiences an increase in value, the Fund will likely not
realize experience that increase to the same extent, and may significantly
underperform the Underlying ETF. The degree to which the Fund will participate
in the Underlying ETF’s price performance will depend on prevailing market
conditions, especially market volatility, at the time the Fund enters into FLEX
Options positions.
U.S.
GOVERNMENT SECURITIES RISK. U.S. government
securities are subject to interest rate risk but generally do not involve the
credit risks associated with investments in other types of debt securities. As a
result, the yields available from U.S. government securities are generally lower
than the yields available from other debt securities. U.S. government securities
are guaranteed only as to the timely payment of interest and the payment of
principal when held to maturity.
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
17
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.
DEPENDENCE
ON KEY PERSONNEL RISK. The Sub-Advisor is
dependent upon the experience and expertise of the Fund's portfolio managers in
providing advisory services with respect to the Fund's investments. If the
Sub-Advisor were to lose the services of any of these portfolio managers, its
ability to service the Fund could be adversely affected. There can be no
assurance that a suitable replacement could be found for any of the portfolio
managers in the event of their death, resignation, retirement or inability to
act on behalf of the Sub-Advisor.
FAILURE
TO QUALIFY AS A REGULATED INVESTMENT COMPANY RISK. If, in any year, the Fund fails to
qualify as a regulated investment company under the applicable tax laws, the
Fund would be taxed as an ordinary corporation. In such circumstances, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying as a regulated
investment company that is accorded special tax treatment.
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 overseeing the Sub-Advisor in the selection and ongoing
monitoring of the securities in the Fund's portfolio and certain other services
necessary for the management of the portfolio.
First Trust is a
limited partnership with one limited partner, Grace Partners of DuPage L.P., and
one general partner, The Charger Corporation. Grace Partners of DuPage
L.P. is a limited partnership with one general partner, The Charger Corporation,
and a number of limited partners. The Charger Corporation is an Illinois
corporation controlled by James A. Bowen, the Chief Executive Officer of First
Trust. First Trust discharges its responsibilities subject to the policies of
the Fund.
First Trust serves
as advisor or sub-advisor for 8 mutual fund portfolios, 10 exchange-traded funds
consisting of 195 series
and 15 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 Cboe VestSM Financial LLC ("Cboe
Vest" or the
"Sub-Advisor") to serve as investment sub-advisor
pursuant to a sub-advisory agreement (the "Sub-Advisory
Agreement"). In this
capacity, Cboe Vest is responsible for the selection and ongoing monitoring of
the securities in the Fund’s investment portfolio. Cboe Vest, with principal
offices at 1765 Greensboro Station Pl, 9th Floor, McLean, Virginia 22102, was
founded in 2012, and is a Delaware LLC. Cboe Vest had approximately $5.33
billion under management or committed to management as of December 31,
2021.
The Sub-Advisor is a
subsidiary of Cboe Vest Group, Inc. (“Cboe
VG”). First Trust
Capital Partners, LLC (“FTCP”), an affiliate of First Trust, is
the largest single holder of voting shares in Cboe VG. The remaining voting
shares of Cboe VG are owned by Cboe Vest, LLC, a wholly-owned subsidiary of Cboe
Global Markets, Inc., and certain individuals who operate Cboe VG and the
Sub-Advisor. Cboe VG was organized in 2012. Cboe® is a registered trademark of Cboe
Global Markets, Inc. VestSM is a service mark of Cboe
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
portfolio.
•
Mr. Sood has over 10 years of
experience in derivative based investment strategy design and trading. Prior to
joining Cboe Vest Mr. Sood worked at ProShare Advisors LLC. Prior to ProShare,
Mr. Sood worked as a Vice
18
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 25 years of
experience as a Portfolio Manager. Mr. Rubin joined Cboe Vest in 2017. Prior to
joining Cboe Vest, Mr. Rubin served as Director of Portfolio Management at
ProShare Advisors LLC from December 2007 to September 2013. Mr. Rubin also
served as Senior Portfolio Manager of ProFund Advisors LLC since November 2004
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 ownership by the portfolio
managers of shares of the Fund is provided in the SAI.
Management
of the Subsidiary
The
Subsidiary is a wholly-owned subsidiary of the Fund. The Subsidiary is organized
under the laws of the Cayman Islands and overseen by its
own board of directors. The Fund is the sole shareholder of the Subsidiary, and
it is currently expected that shares of the Subsidiary will not be sold or
offered to other investors. The Fund and the Subsidiary in the aggregate are
managed to comply with the compliance policies and procedures of the Fund. As a
result, in managing the Fund’s and the Subsidiary’s portfolios, First Trust will
comply with the investment policies and restrictions that apply to the
management of the Fund and the Subsidiary (on a consolidated basis), and, in
particular, to the requirements relating to leverage, liquidity, brokerage,
capital structure and the timing and method of the valuation of the Fund’s and
the Subsidiary’s portfolio investments. The Trust’s Chief Compliance Officer
oversees implementation of the Subsidiary’s policies and procedures and makes
periodic reports to the Trust’s Board of Trustees regarding the Subsidiary’s
compliance with its policies and procedures. First Trust serves as the
investment advisor of the Subsidiary and Cboe Vest serves as investment
sub-advisor to the Subsidiary. The investment advisor (First Trust) and
investment sub-advisor (Cboe Vest) to the Subsidiary comply with provisions of
the 1940 Act relating to investment advisory contracts. The Subsidiary does not
pay either the Advisor or Sub-Advisor a management fee for investment management
services. While the Subsidiary has also entered into separate contracts for the
provision of custody, transfer agency and audit services, the Advisor will pay
for these expenses.
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 0.85% 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, acquired fund fees and expenses, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees payable pursuant to a 12b-1 plan, if
any, and extraordinary expenses.
A discussion
regarding the Board’s approval of the Investment Management Agreement and
Investment Sub-Advisory Agreement is available in the Fund’s
Semi-Annual Report to shareholders for the fiscal period ended June 30,
2021.
How
to Buy and Sell Shares
Most
investors buy and sell shares of the Fund in secondary market transactions
through brokers. Shares of the Fund are listed for trading on the
secondary market on one or more national securities exchanges. Shares can be
bought and sold throughout the trading day like other publicly traded shares.
There is no minimum investment when buying shares on the Exchange. Although
shares are generally purchased and sold in “round lots” of 100 shares, brokerage
firms typically permit investors to purchase or sell shares in smaller “odd
lots,” at no per-share price differential. When buying or selling shares through
a broker, investors should expect to pay brokerage commissions, investors may
receive less than the net asset value of the shares because shares are bought
and sold at market prices rather than at net asset value, and investors may pay
some or all of the bid-ask spread for each transaction (purchase or sale) of
Fund shares. Share prices are reported in dollars and cents per share.
19
Under
normal circumstances, the Fund will pay out redemption proceeds to a redeeming
authorized participant within two days after the
authorized participant’s redemption request is received, in accordance with the
process set forth in the Fund’s SAI and in the agreement between the authorized
participant and the Fund’s distributor. However, the Fund reserves the right,
including under stressed market conditions, to take up to seven days after the
receipt of a redemption request to pay an authorized participant, all as
permitted by the 1940 Act. If the Fund has foreign investments in a country
where a local market holiday, or series of consecutive holidays, or the extended
delivery cycles for transferring foreign investments to redeeming authorized
participants prevents the Fund from delivering such foreign investments to an
authorized participant in response to a redemption request, the Fund may take up
to 15 days after the receipt of the redemption request to deliver such
investments to the authorized participant.
For purposes of the
1940 Act, the Fund is treated as a registered investment company and the acquisition of shares by
other registered investment companies and companies relying on Sections 3(c)(1)
and 3(c)(7) of the 1940 Act is subject to the restrictions of Section 12(d)(1)
of the 1940 Act and the related rules and interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is
the record owner of all outstanding shares of the Fund and is recognized as the
owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all
shares. Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book-entry or “street name” form.
Share
Trading Prices
The
trading price of shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and
can be affected by market forces of supply and demand, economic conditions and
other factors.
Frequent
Purchases and Redemptions of the Fund's Shares
The Fund imposes no
restrictions on the frequency of purchases and redemptions (“market
timing”). In determining
not to approve a written, established policy, the Board evaluated the risks of
market timing activities by the Fund's shareholders. The Board considered that
the Fund's shares can only be purchased and redeemed directly from the Fund in
Creation Units by broker-dealers and large institutional investors that have
entered into participation agreements (i.e., authorized participants
(“APs”)) and that the vast majority of
trading in the Fund's shares occurs on the secondary market. Because the
secondary market trades do not involve the Fund directly, it is unlikely those
trades would cause many of the harmful effects of market timing, including
dilution, disruption of portfolio management, increases in the Fund's trading
costs and the realization of capital gains. With respect to trades directly with
the Fund, to the extent effected in‑kind (i.e., for securities), those trades do
not cause any of the harmful effects that may result from frequent cash trades.
To the extent that the Fund may effect the purchase or redemption of Creation
Units in exchange wholly or partially for cash, the Board noted that such trades
could result in dilution to the Fund and increased transaction costs, which
could negatively impact the Fund's ability to achieve its investment 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 that
are consistent with the premiums received from covered calls written pursuant
the Fund’s investment strategy. The Board may amend this distribution policy at
any time, or the Fund may cease distributions entirely, at any time.
20
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 in order
to maintain the distribution rate. The amount treated as a return of capital
will reduce a shareholder’s adjusted basis in the shareholder’s shares, thereby
increasing the potential gain or reducing the potential loss on the sale of
shares. Investors should not make any conclusions about the Fund’s investment
performance from the amount of the Fund’s distributions or from the terms of the
Fund’s distribution policy.
The
Fund may at times, in its discretion, pay out less than the entire amount of net
investment income earned in any particular period and may at
times pay out such accumulated undistributed income in addition to net
investment income earned in other periods in order to permit the Fund to
maintain a more stable level of distributions. As a result, the dividend paid by
the Fund to shareholders for any particular period may be more or less than the
amount of net investment income earned by the Fund during such
period.
Dividends
from net investment income of the Fund, if any, are declared and paid monthly by
the Fund. The Fund distributes its net realized
capital gains, if any, to shareholders at least annually.
Distributions
in cash may be reinvested automatically in additional whole shares only if the
broker through whom you purchased shares makes such
option available. Such shares will generally be reinvested by the broker based
upon the market price of those shares and investors may be subject to customary
brokerage commissions charged by the broker.
Federal
Tax Matters
This
section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Fund. This section is current as of the
date of this prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. 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 could disagree with any conclusions set
forth in this section. In addition, counsel to the Fund may not have been asked
to review, and may not have reached a conclusion with respect to, the federal
income tax treatment of the assets to be included in the Fund. The following
disclosure may not be sufficient for you to use for the purpose of avoiding
penalties under federal tax law.
As with any
investment, you should seek advice based on your individual circumstances from
your own tax advisor.
Fund
Status
The Fund intends to
continue to qualify as a
“regulated investment company” under the federal tax laws. If the Fund qualifies
as a regulated investment company and distributes its income as required by the
tax law, the Fund generally will not pay federal income taxes.
Although the
Subsidiary’s options
positions provide exposure to the Underlying ETF, and not gold directly, the
Underlying ETF is a grantor trust and its shareholders are treated, for U.S.
federal income tax purposes, as if they directly owned a pro rata share of the
Underlying ETF’s assets.
Distributions
The Fund's
distributions are generally taxable. After the end of each year, you will
receive a tax statement that separates the distributions of the Fund into two
categories: ordinary income distributions and capital gain dividends. Ordinary
income distributions are generally taxed at your ordinary tax rate, however, as
further discussed below certain ordinary income distributions received from the
Fund may be taxed at the capital gains tax rates. Generally, you will treat all
capital gain dividends as long-term capital gains regardless of how long you
have owned your shares.
To determine your
actual tax liability for your capital gain dividends, you must calculate your
total net capital gain or loss for the tax year after considering all of
your other taxable transactions, as described below. In addition, the Fund may
make distributions that represent a return of capital for tax purposes and thus
will generally not be taxable to you; however, such distributions may reduce
your tax basis in your shares, which could result in you having to pay higher
taxes in the future when shares are sold, even if you sell the shares at a loss
from your original investment. A “return of capital” is a return, in whole or in
part, of the funds that you previously invested in the Fund. A return of capital
distribution should not be considered part of the Fund’s dividend yield or total
return of an investment in Fund shares. The tax status of your distributions
from the Fund
21
is
not affected by whether you reinvest your distributions in additional shares or
receive them in cash. The income from the Fund that you must
take into account for federal income tax purposes is not reduced by amounts used
to pay a deferred sales fee, if any. The tax laws may require you to treat
distributions made to you in January as if you had received them on December 31
of the previous year.
Income
from the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally
applies to your net investment income if your adjusted
gross income exceeds certain threshold amounts, which are $250,000 in the case
of married couples filing joint returns and $200,000 in the case of single
individuals.
Dividends
Received Deduction
A
corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies.
Capital
Gains and Losses
If
you are an individual, the maximum marginal stated federal tax rate for net
capital gains is generally 20% (15% or 0% for taxpayers with
taxable incomes below certain thresholds). Capital gains may also be subject to
the Medicare tax described above. Generally, the maximum capital gains rate for
individuals for an investment in gold is 28%. However, income from the
Subsidiary may be subject to tax at higher ordinary income rates when
distributed to investors.
Net
capital gain equals net long-term capital gain minus net short-term capital loss
for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your shares to determine your holding period. However, if you receive a
capital gain dividend from the Fund and sell your share at a loss after holding
it for six months or less, the loss will be recharacterized as long-term capital
loss to the extent of the capital gain dividend received. The tax rates for
capital gains realized from assets held for one year or less are generally the
same as for ordinary income. The Internal Revenue Code of 1986, as amended,
treats certain capital gains as ordinary income in special
situations.
An election may be
available to you to defer recognition of the gain attributable to a capital gain
dividend if you make certain qualifying investments within a
limited time. You should talk to your tax advisor about the availability of this
deferral election and its requirements.
Sale
of Shares
If you sell or
redeem your shares, you will generally recognize a taxable gain or loss. To
determine the amount of this gain or loss, you must subtract your tax
basis in your shares from the amount you receive in the transaction. Your tax
basis in your shares is generally equal to the cost of your shares, generally
including sales charges. In some cases, however, you may have to adjust your tax
basis after you purchase your shares. An election may be available to you to
defer recognition of capital gain if you make certain qualifying investments
within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Taxes
on Purchase and Redemption of Creation Units
If
you exchange securities for Creation Units, you will generally recognize a gain
or a loss. The gain or loss will be equal to the difference between
the market value of the Creation Units at the time and your aggregate basis in
the securities surrendered and the cash component paid. See the SAI for more
information. If you exchange Creation Units for securities, you will generally
recognize a gain or loss equal to the difference between your basis in the
Creation Units and the aggregate market value of the securities received and the
cash redemption amount. The Internal Revenue Service, however, may assert that a
loss realized upon an exchange of securities for Creation Units or Creation
Units for securities cannot be deducted currently under the rules governing
“wash sales,” or on the basis that there has been no significant change in
economic position.
Treatment
of Fund Expenses
Expenses incurred and
deducted by the Fund will generally not be treated as income taxable to
you.
Non-U.S.
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
22
as
dividends for federal income tax purposes (other than dividends which the Fund
properly reports as capital gain dividends) and will be subject
to U.S. federal income taxes, including withholding taxes, subject to certain
exceptions described below. However, distributions received by a non-U.S.
investor from the Fund that are properly reported by the Fund as capital gain
dividends may not be subject to U.S. federal income taxes, including withholding
taxes, provided that the Fund makes certain elections and certain other
conditions are met. Distributions from the Fund that are properly reported by
the Fund as an interest-related dividend attributable to certain interest income
received by the Fund or as a short-term capital gain dividend attributable to
certain net short-term capital gain income received by the Fund may not be
subject to U.S. federal income taxes, including withholding taxes when received
by certain non-U.S. investors, provided that the Fund makes certain elections
and certain other conditions are met.
Distributions
may be subject to a U.S.
withholding tax of 30% in the case of distributions to (i) certain non-U.S.
financial institutions that have not entered into an agreement with the U.S.
Treasury to collect and disclose certain information and are not resident in a
jurisdiction that has entered into such an agreement with the U.S. Treasury and
(ii) certain other non-U.S. entities that do not provide certain certifications
and information about the entity’s U.S. owners. This withholding tax is also
currently scheduled to apply to the gross proceeds from the disposition of
securities that produce U.S. source interest or dividends. However, proposed
regulations may eliminate the requirement to withhold on payments of gross
proceeds from dispositions.
Distribution
Plan
FTP
serves as the distributor of Creation Units for the Fund on an agency basis. FTP
does not maintain a secondary market in shares.
The
Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. In accordance with the Rule 12b-1 plan, the
Fund is authorized to pay an amount up to 0.25% of its average daily net assets
each year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional
services.
The Fund does not
currently pay 12b-1 fees, and pursuant to a contractual arrangement, the Fund
will not pay 12b-1 fees any time before April 30, 2023.
However, in the event 12b-1 fees are charged in the future, because these fees
are paid out of the Fund's assets, over time these fees will increase the cost
of your investment and may cost you more than certain other types of sales
charges.
Net
Asset Value
The Fund's net asset
value is determined as of the close of trading (normally 4:00 p.m., Eastern
Time) on each day the New York Stock Exchange (the "NYSE") is open for business. Net asset
value is calculated for the Fund by taking the market price of the Fund’s total
assets, including interest or dividends accrued but not yet collected, less all
liabilities, and dividing such amount by the total number of shares outstanding.
The result, rounded to the nearest cent, is the net asset value per share. All
valuations are subject to review by the Board or its delegate.
The
Fund's investments are valued daily at market or, in the absence of market value
with respect to any investments (or as described below), at
fair value. In most cases, due to the nature of the FLEX Options in which the
Fund invests, the Fund’s investments are valued at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e., a regulated market)
and are primarily obtained from third party pricing services (“Pricing
Services”). Fair value prices
represent any prices not considered market value prices and are either obtained
from a Pricing Service or determined by the Advisor’s pricing committee (the
“Pricing
Committee”), in accordance with
valuation procedures (which may be revised from time to time) adopted by the
Board, and in accordance with provisions of the 1940 Act. As a general
principle, the current “fair value” of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. Valuing the Fund’s assets using fair value pricing can result in
using prices for those assets (particularly assets that trade in foreign
markets) that may differ from current market valuations.
Under
certain circumstances, even when there is a market price available, the Fund’s
investments may be valued at fair value as described above.
Such fair valuation may occur, for example, when market quotations are deemed to
be stale or unreliable because the security is not traded frequently, trading on
the security ceased before the close of the trading market or issuer-specific
events occurred after the security ceased trading or because of the passage of
time between the close of the market on which the security trades and the close
of the Exchange and when the Fund calculates its NAV. In the case of the
23
Fund,
market value prices will be considered only on those trading dates on which a
trade has actually occurred. On other days, fair value
pricing will take the form of a model price provided by a third-party pricing
vendor.
The
Fund's investments are valued daily at market value or, in the absence of market
value with respect to any portfolio securities, at fair
value, in accordance with valuation procedures adopted by the Board and in
accordance with the 1940 Act. Portfolio securities listed on any exchange other
than The Nasdaq Stock Market LLC ("Nasdaq") and the London
Stock Exchange Alternative Investment Market (“AIM”) are valued at the
last sale price on the business day as of which such value is being determined.
Securities listed on Nasdaq or the AIM are valued at the official closing price
on the business day as of which such value is being determined. If there has
been no sale on such day, or no official closing price in the case of securities
traded on Nasdaq or the AIM, the securities are fair valued at the mean of the
most recent bid and ask prices on such day. Portfolio securities traded on more
than one securities exchange are valued at the last sale price or official
closing price, as applicable, on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities. For securities traded on an exchange that provides both an
official closing price and a last sale price, the Advisor's Pricing Committee,
at its discretion, shall determine to use either the last sale price or the
official closing price, depending on which price reflects the appropriate market
value. Portfolio securities traded in the over-the-counter market, but excluding
securities trading on Nasdaq or the AIM, are fair valued at the mean of the most
recent bid and asked price, if available, and otherwise at the closing bid
price. Short-term investments that mature in less than 60 days when purchased
are fair valued at cost adjusted for amortization of premiums and accretion of
discount, provided the Advisor’s Pricing Committee has determined that the use
of amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of determination. Net asset
value may change on days when investors may not sell or redeem Fund
shares.
Fund
Service Providers
The Bank of New York
Mellon, 240 Greenwich Street, New York, New York, 10286, acts as the
administrator, custodian and fund accounting and transfer agent
for the Fund. Chapman and Cutler LLP, 320 S. Canal St., Chicago, Illinois 60606,
serves as legal counsel to the Fund.
Disclaimers
The Fund is not
sponsored, endorsed, sold or promoted by SPDR® Gold Trust and WGTS, or their
affiliates. SPDR®
Gold Trust and WGTS, or
their affiliates have not passed on the legality or suitability of, or the
accuracy or adequacy of, descriptions and disclosures relating to the Fund or
the FLEX Options. SPDR®
Gold Trust and WGTS, or
their affiliates make no representations or warranties, express or implied,
regarding the advisability of investing in the Fund or the FLEX Options or
results to be obtained by the Fund or the FLEX Options, shareholders or any
other person or entity from use of the Underlying ETF. SPDR® Gold Trust and WGTS, or their
affiliates have no liability in connection with the management, administration,
marketing or trading of the Fund or the FLEX Options.
Cboe® is a registered trademark of Cboe
Exchange, Inc., which has been licensed for use in the name of the Fund. The
Fund is not sponsored, endorsed, sold or marketed by Cboe Exchange, Inc. or any
of its affiliates (“Cboe”) or their respective third-party
providers, and Cboe and its third-party providers make no representation
regarding the advisability of investing in the Fund and shall have no liability
whatsoever in connection with the Fund.
Premium/Discount
Information
Information
showing the number of days the market price of the Fund's shares was greater (at
a premium) and less (at a discount) than the Fund's net
asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter),
is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Total
Return Information
The table below
compares the total return of the Fund to a gold price benchmark and a
broad-based market index. The information presented for the Fund is
for the period indicated.
“Cumulative total
returns” represent the total change in value of an investment over the period
indicated. The net asset value per share of the Fund is the value of
one share of the Fund and is computed by dividing the value of all assets of the
Fund (including accrued interest and dividends), less liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
outstanding shares. The net asset value return is based on the net asset value
per share of the Fund
24
and the market
return is based on the market price per share of the Fund. The price used to
calculate market return (“Market
Price”) is determined by
using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s net
asset value is calculated. Under SEC rules, the NBBO consists of the highest
displayed buy and lowest sell prices among the various exchanges trading the
Fund at the time a Fund's net asset value is calculated. Since the shares of the
Fund typically do not trade in the secondary market until several days after a
Fund's inception, for the period from inception to the first day of secondary
market trading in shares of the Fund, the net asset value of the Fund is used as
a proxy for the secondary market trading price to calculate market returns.
Market and net asset value returns assume that all distributions have been
reinvested in the Fund at Market Price and net asset value, respectively. An
index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, an index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns reflect the reinvestment of dividends on securities in
the Indices. The returns shown in the table below do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption or
sale of shares of the Fund. The investment return and principal value of shares
of the Fund will vary with changes in market conditions. Shares of the Fund may
be worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future
results.
FT
Cboe Vest Gold Strategy Target Income ETF (IGLD)
Total Returns as of December 31, 2021
Total Returns as of December 31, 2021
|
|
Cumulative |
|
|
Inception
(3/2/2021) |
|
Fund
Performance |
|
|
Net Asset
Value |
3.14% |
|
Market
Price |
3.44% |
|
Index
Performance |
|
|
LBMA Gold
Price |
5.30% |
|
S&P
500® Index -
Price Return |
23.15% |
25
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the period shown. Certain information reflects financial
results for a single share of the Fund. The total return represents the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). The information for
the period indicated has been derived from financial statements audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report to Shareholders dated
December 31, 2021 and is incorporated by reference in the Fund's SAI, which is
available upon request.
First Trust
Exchange-Traded Fund
Financial
Highlights
For a share outstanding throughout the period
For a share outstanding throughout the period
FT Cboe Vest Gold
Strategy Target Income ETF®
(IGLD)
|
|
Period
Ended
12/31/2021(a)
|
|
| |
|
Net
asset value, beginning of period |
$20.14 |
|
Income
from investment operations: |
|
|
Net
investment income (loss) |
(0.08) |
|
Net
realized and unrealized gain (loss) |
0.71 |
|
Total
from investment operations |
0.63 |
|
Distributions
paid to shareholders from: |
|
|
Return of
capital |
(0.46) |
|
Net
asset value, end of period |
$20.31 |
|
Total
Return (b) |
3.14% |
|
Ratios/supplemental
data: |
|
|
Net
assets, end of period (in 000’s) |
$31,476 |
|
Ratios
to average net assets: |
|
|
Ratio of
total expenses to average net assets |
0.85%(c)
|
|
Ratio of
net investment income (loss) to average net assets |
(0.76)%(c)
|
|
Portfolio
turnover rate (d)
|
0% |
(a)
Inception date
is March 2, 2021, which is consistent with the commencement of investment
operations and is the date the initial creation units were
established.
(b)
Total return is
calculated assuming an initial investment made at the net asset value at the
beginning of the period, reinvestment of all distributions at net asset value
during the period, and redemption at net asset value on the last day of the
period. The return presented does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not
annualized for periods of less than a year.
(c)
Annualized.
(d)
Portfolio
turnover is calculated for the time period presented and is not annualized for
periods of less than a year and does not include securities received or
delivered from processing creations or redemptions and in-kind transactions.
26
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 of 1933, as amended
(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.
27
|
First
Trust
Exchange-Traded
Fund |
FT Cboe Vest Gold Strategy 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 report, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund's performance during
the last fiscal year. The Fund's most recent SAI, annual and semi-annual reports
and certain other information are available free of charge by calling the Fund
at (800) 621-1675, on the Fund's website at www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You may obtain
this and other information regarding the Fund, including the SAI and the Codes
of Ethics adopted by
First Trust, FTP and the Trust, directly from the Securities and Exchange
Commission (the "SEC"). Information on the SEC’s website
is free of charge. Visit the SEC’s online EDGAR database at www.sec.gov. You may
also request information regarding the Fund by sending a request (along with a
duplication fee) to the SEC by sending an electronic request to
[email protected].
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC
File #: 333-125751
811-21774
811-21774