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First
Trust
Exchange-Traded
Fund IV |
Prospectus
First Trust North
American Energy Infrastructure Fund
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Ticker
Symbol: |
EMLP |
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Exchange: |
NYSE
Arca |
First
Trust North American Energy Infrastructure Fund (the “Fund”) lists and
principally trades its shares on NYSE Arca, Inc. (“NYSE
Arca” or
the “Exchange”). Market prices may
differ to some degree from the net asset value of the shares. Unlike mutual
funds, the Fund issues and redeems shares at net asset value, only in large
specified blocks of shares called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund IV (the “Trust”) and an actively
managed exchange-traded fund organized as a separate series of a registered
management investment company.
Except
when aggregated in Creation Units, the shares are not redeemable securities of
the Fund.
The
Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
NOT
FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
March
1, 2022
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
Calendar Year Total Returns as of 12/31
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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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Blended
Benchmark(1) (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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9
(1)
Management
Investment
Advisor
First
Trust Advisors L.P. (“First
Trust”
or the “Advisor”)
Investment
Sub-Advisor
Energy
Income Partners, LLC (“Energy
Income Partners” or the
“Sub-Advisor”)
Portfolio
Managers
The
following persons serve as portfolio managers of the Fund:
•
James J. Murchie,
Co-Founder, Chief Executive Officer, Co-Portfolio Manager and Principal of
Energy Income Partners
•
Eva Pao, Co-Founder,
Co-Portfolio Manager and Principal of Energy Income Partners
•
John K. Tysseland,
Co-Portfolio Manager and Principal of Energy Income Partners
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 2012, except for John
K. Tysseland who has served as a member of the portfolio management team of the
Fund since 2016.
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.
10
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 is actively managed and does
not seek to track the performance of an index. The Fund’s investment objective
is fundamental and may not be changed without approval by the holders of a
majority of the outstanding voting securities of the Fund. Unless an investment
policy is identified as being fundamental, all investment policies included in
this prospectus and the Fund's Statement of Additional Information (“SAI”) are non-fundamental and may be
changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval. If
there is a material change to the Fund’s principal investment strategies, you
should consider whether the Fund remains an appropriate investment for you.
There is no guarantee that the Fund will achieve its investment
objective.
The
Fund has adopted a non-fundamental investment policy pursuant to Rule 35d-1
under the 1940 Act (the “Name
Policy”)
whereby the Fund, under normal market conditions, invests at least 80% of its
net assets (including investment borrowings) in equity securities of companies
deemed by the Sub-Advisor to be engaged in the energy infrastructure sector. The
Name Policy may be changed by the Board of Trustees without shareholder approval
upon 60 days’ prior written notice.
Additional
Information on the Fund’s Strategy
The
Sub-Advisor believes that a professionally managed portfolio of higher dividend
paying energy infrastructure companies in non-cyclical
segments offers an attractive balance of income and growth. The Sub-Advisor’s
priority is to focus on steady fee-for-service income and will limit the
cyclical energy exposure of the portfolio in order to reduce the volatility of
returns. The Sub-Advisor believes the use of rigorous investment research and
analytical tools along with conservative portfolio construction provides a value
added service to the individual investor making an investment in these asset
classes.
The Sub-Advisor
believes that successful investing in the energy infrastructure industry
requires strict capital spending discipline because the industry is capital
intensive, mature and has low rates of overall growth. The Sub-Advisor believes
there is a high correlation between rates of return and the portion of cash flow
reinvested in the business—the lower the
level of reinvestment, the higher the return. Capital
spending discipline can result from careful prudent management or an agreement
with shareholders to pay out most available free cash flow. The Sub-Advisor
believes that companies paying out a large portion of their available free cash
flow in the form of monthly or quarterly distributions or dividends—such as
certain pipeline
companies and utilities in the U.S. and Canada—have a built-in
capital spending discipline and provide an attractive investment universe
from which to construct
a portfolio. While growth opportunities are still available to these companies,
they must go to the capital markets and justify to yield-sensitive shareholders
the issuance of more equity and debt in order to fund those opportunities. The
Sub-Advisor believes that this transparency tends to discourage acquisitions and
new construction that would be dilutive to the dividend paying capability on
existing shares and tends to encourage expenditures that are
accretive.
A
high-payout ratio, however, brings with it an income obligation that the
Sub-Advisor believes is matched by an expectation on the part of the
shareholders that such dividends will be steady. Retail investors that make up
the bulk of the shareholder base of these securities have punished the share
prices of MLPs and similar securities when dividends or distributions have been
cut or eliminated. The Sub-Advisor believes that the assets that best support a
high-payout ratio are those with steady, fee-for-service businesses with
relatively low sustaining capital obligations. In the energy infrastructure
industry, assets such as interstate pipelines, intrastate pipelines with
long-term contracts, power generation assets, storage and terminal facilities
with long-term contracts and regulated power transmission and distribution
assets are the types of assets that fit best. By contrast, other areas of the
energy industry such as oil and gas exploration, development and production are
less well suited because the cash flows are cyclical in nature, being driven by
commodity prices, and because oil and gas assets are wasting assets, while the
dividend obligation is perpetual.
Unlike
oil and gas exploration, development and production and petroleum refining, the
energy infrastructure industry is characterized by
non-cyclical fee-for-service revenues. Also, unlike the other segments of the
energy industry, the sustaining capital requirements for pipelines, storage and
other infrastructure is low. The Sub-Advisor believes that these two
characteristics make energy infrastructure assets a good match for investors who
desire steady income that has the ability to grow.
Much
of the pipeline and storage infrastructure currently owned by energy
infrastructure companies were built many years ago by the major oil
companies and pipeline and power utilities. Over the years, these assets have
been sold off to fund projects with higher risk such as oil drilling,
unregulated power generation or energy trading. The result is that the legacy
assets, many of which are natural monopolies, can now be owned as pure plays in
the energy infrastructure asset classes.
11
As
oil and gas production in the U.S. continues to rise, new technologies have made
long known resources economic, even at lower prices. The
resulting higher margins for oil and gas drilling have made the oil and gas
production companies more willing to guarantee solid returns for long-term
contracts to pipeline owners as an incentive to add capacity so they can deliver
their oil and gas to market more quickly. In essence, energy infrastructure
companies have an increased ability to “lock-in” the attractive economics of
today’s energy industry.
The
Fund may invest in equity securities of MLPs without limit, however, in order to
comply with applicable tax diversification rules, the Fund may
have to limit the percentage of its nets assets invested in MLPs on a periodic
basis. The Sub-Advisor believes that this investment opportunity is difficult
for many large investors to take advantage of, which has left these securities
largely in the hands of retail investors. Non-taxable investors, such as pension
funds and endowments, have not historically owned significant portions of these
securities because MLPs can generate a substantial amount of “unrelated business
taxable income,” or UBTI, which can be disadvantageous to such institutions. In
addition, for tax years beginning on or before October 22, 2004, MLPs
represented non-qualifying income for mutual funds.
The Sub-Advisor has
many years of experience investing in the energy sector. The Sub-Advisor believes that
investment success in the energy infrastructure industry requires a working
knowledge of the entire energy industry. In essence, it is the businesses the
pipelines connect to, much more than the pipe itself, that determines financial
success. That means knowledge of the oil and gas segment, refining and
marketing, petrochemicals and natural gas processing and storage. It also means
understanding price and cost competitiveness of competing fuels such as coal and
nuclear as well as the impact of imports and global markets in the North
American energy industry.
In
addition, the Sub-Advisor believes that the attractive characteristics of the
energy infrastructure business can be materially enhanced by a
rigorous application of investment research and portfolio construction tools.
There is generally less research coverage of these companies than in other
sectors of comparable size whose securities are owned by institutional
investors. The Sub-Advisor believes this creates an opportunity to outperform
the sector using such investment research and portfolio construction tools.
Since the companies in this asset class are affected by virtually every phase of
the energy business (even if they are not directly invested in every phase), the
Sub-Advisor believes it is necessary to have a strong working knowledge of the
business including oil and gas production and gathering, transportation,
refining and marketing, gas liquids processing and fractionation, petrochemical
demand and cost structure as well as the regulatory framework that regulates the
industry.
Fund
Investments
Principal
Investments
Equity
Securities
Under
normal market conditions, the Fund will invest at least 80% of its net assets
(including investment borrowings) in equity securities of
companies deemed by the Sub-Advisor to be engaged in the energy infrastructure
sector. Equity securities include common stocks; preferred securities; warrants
to purchase common stocks or preferred securities; securities convertible into
common stocks or preferred securities; master limited partnership ("MLP") units and MLP
I-units discussed below and other securities with equity
characteristics.
If
the Fund’s investment in qualifying MLPs exceeds 25% of the value of the Fund’s
total assets at the end of any quarter in which the Fund is
required to test its diversification, the Fund may not qualify as a regulated
investment company for federal income tax purposes unless the Fund takes
corrective measures within 30 days of the end of the quarter.
Master
Limited Partnerships
The
Fund may invest in equity securities of MLPs without limit, however, in order to
comply with applicable tax diversification rules, the Fund may
have to limit the percentage of its nets assets invested in MLPs on a periodic
basis. As of the date of this prospectus, this limit is 25% of the Fund’s assets
on a quarterly basis.
MLPs
are limited partnerships whose shares (or units) are listed and traded on a U.S.
securities exchange, just like common stock. To qualify as
an MLP, a partnership must receive at least 90% of its income from qualifying
sources such as natural resource activities. Natural resource activities include
the exploration, development, mining, production, processing, refining,
transportation, storage and marketing of mineral or natural resources. MLPs
generally have two classes of owners, the general partner and limited partners.
The general partner, which is generally a major energy company, investment fund
or the management of the MLP, typically controls the MLP through a 2% general
partner equity interest in the MLP plus common
12
units
and subordinated units. Limited partners own the remainder of the partnership,
through ownership of common units, and have a limited
role in the partnership’s operations and management.
MLPs
are typically structured such that common units have first priority to receive
quarterly cash distributions up to an established minimum
quarterly dividend (“MQD”). Common units also
accrue arrearages in distributions to the extent the MQD is not paid. Once
common units have been paid, subordinated units receive distributions of up to
the MQD, but subordinated units do not accrue arrearages. Distributable cash in
excess of the MQD paid to both common and subordinated units is distributed to
both common and subordinated units generally on a pro rata basis. The general
partner is also eligible to receive incentive distributions if the general
partner operates the business in a manner which maximizes value to unit holders.
As the general partner increases cash distributions to the limited partners, the
general partner receives an increasingly higher percentage of the incremental
cash distributions. A common arrangement provides that the general partner can
reach a tier where the general partner is receiving 50% of every incremental
dollar paid to common and subordinated unit holders. By providing for incentive
distributions the general partner is encouraged to streamline costs and acquire
assets in order to grow the partnership, increase the partnership’s cash flow,
and raise the quarterly cash distribution in order to reach higher tiers. Such
results benefit all security holders of the MLP.
MLP
I-Shares
I-Shares
represent an ownership interest issued by an affiliated party of an MLP. The MLP
affiliate uses the proceeds from the sale of I-Shares to
purchase limited partnership interests in the MLP in the form of i-units.
I-units have similar features as MLP common units in terms of voting rights,
liquidation preference and distributions. However, rather than receiving cash,
the MLP affiliate receives additional i-units in an amount equal to the cash
distributions received by MLP common units. Similarly, holders of I-Shares will
receive additional I-Shares, in the same proportion as the MLP affiliates’
receipt of i-units, rather than cash distributions. I-Shares themselves have
limited voting rights which are similar to those applicable to MLP common units.
The MLP affiliate issuing the I-Shares is structured as a corporation for
federal income tax purposes. As a result, I-Shares holders, such as the Fund,
will receive a Form 1099 rather than a Form K-1 statement. I-Shares are traded
on the New York Stock Exchange.
Non-U.S.
Investments
The
Fund may invest in U.S. dollar-denominated depositary receipts, U.S.
dollar-denominated foreign securities and non-U.S. dollar-denominated
foreign securities. The Fund’s investments may include American Depositary
Receipts (“ADRs”) and Global
Depositary Receipts (“GDRs”).
The
Fund may invest in non-U.S. securities, which may include securities denominated
in U.S. dollars or in non-U.S. currencies. Because evidences of
ownership of such securities usually are held outside the United States, the
Fund would be subject to additional risks if it invested in non-U.S. securities,
which include possible adverse political and economic developments, seizure or
nationalization of foreign deposits and adoption of governmental restrictions
which might adversely affect or restrict the payment of distributions on the
non-U.S. securities to investors located outside the country of the issuer,
whether from currency blockage or otherwise. Since non-U.S. securities may be
purchased with and payable in foreign currencies, the value of these assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations
Non-Principal
Investments
Cash
Equivalents and Short-Term Investments
Normally,
the Fund invests substantially all of its assets to meet its investment
objective. The Fund may invest 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.
13
Derivatives
The
Fund may use futures, total return swaps, non-U.S. currency swaps, credit
default swaps, options and other derivative instruments to seek
to enhance return, to hedge some of the risks of its investments in securities,
as a substitute for a position in the underlying asset, to reduce transaction
costs, to maintain full market exposure (which means to adjust the
characteristics of their investments to more closely approximate those of the
markets in which it invests), to manage cash flows, to limit exposure to losses
due to changes to non-U.S. currency exchange rates or to preserve
capital.
The
Fund will comply with the regulatory requirements of the Securities and Exchange
Commission and the Commodity Futures Trading Commission
with respect to coverage of options and futures positions by registered
investment companies and, if the guidelines so require, will earmark or set
aside cash, U.S. Government securities, high grade liquid debt securities and/or
other liquid assets permitted by the Securities and Exchange Commission and
Commodity Futures Trading Commission in a segregated custodial account in the
amount prescribed (or take such other actions permitted by law). Securities
earmarked or held in a segregated account cannot be sold while the futures or
options position is outstanding, unless replaced with other permissible assets,
and will be marked to market daily.
The
Fund may sell covered call options, which enables the purchaser to elect to
receive a security at a predetermined price and time. A call
option written by the Fund on a security is “covered” if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for consideration that
is set aside or earmarked) upon conversion or exchange of other securities held
by the Fund. A call option is also covered if the Fund holds a call on the same
security as the call written where the exercise price of the call held is (i)
equal to or less than the exercise price of the call written or (ii) greater
than the exercise price of the call written, provided the difference is
maintained by the Fund in segregated assets. Without limiting the foregoing, the
Fund may use other derivatives from time to time and other methods of
segregation or cover as permitted by applicable law.
Investment
Companies
The
Fund may invest in securities of other investment companies, including
exchange-traded funds (“ETFs”), that invest
primarily in securities of the types in which the Fund may invest directly. As a
shareholder in an investment company, the Fund bears its ratable share of such
investment company’s expenses and would remain subject to payment of the
investment company’s advisory and administrative fees with respect to assets so
invested. Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests in other investment companies. In addition, the Fund
will incur brokerage costs when purchasing and selling shares of ETFs and
closed-end investment companies. Securities of other investment companies may be
leveraged, in which case the value and/or yield of such securities will tend to
be more volatile than securities of unleveraged securities.
The
Fund’s ability to invest in other investment companies is limited 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) and 12(d)(1)(G). The Fund may
satisfy the Name Policy by investing in investment companies and other pooled
investment vehicles that are subject to a comparable name policy and invest in
the types of securities in which the Fund may invest directly.
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 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.
14
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.
CANADA
RISK.
The Fund invests significantly in the securities of Canadian issuers. The
Canadian economy is heavily dependent on the demand for natural resources and
agricultural products. Canada is a major producer of commodities such as forest
products, metals, agricultural products, and energy related products like oil,
gas, and hydroelectricity. Accordingly, a change in the supply and demand of
these resources, both domestically and internationally, can have a significant
effect on Canadian market performance. Canada is a top producer of zinc and
uranium and a global source of many other natural resources, such as gold,
nickel, aluminum, and lead. Conditions that weaken demand for such products
worldwide could have a negative impact on the Canadian economy as a whole. The
Canadian economy is heavily dependent on relationships with certain key trading
partners. The United States is Canada’s largest trading and investment partner,
and the Canadian economy is significantly affected by developments in the U.S.
economy. Any downturn in U.S. economic activity is likely to have an adverse
impact on the Canadian economy.
CURRENCY
RISK.
The Fund may invest in securities denominated in a non-U.S. currency. Changes in
currency exchange rates affect the value of investments denominated in a foreign
currency, the value of dividends and interest earned from such securities and
gains and losses realized on the sale of such securities. The Fund’s net asset
value could decline if a currency to which the Fund has exposure depreciates
against the U.S. dollar or if there are delays or limits on repatriation of such
currency. Currency exchange rates can be very volatile and can change quickly
and unpredictably. Changes in currency exchange rates may affect the Fund's net
asset value, the value of dividends and interest earned, and gains and losses
realized on the sale of securities. An increase in the strength of the U.S.
dollar relative to other currencies may cause the value of the Fund to decline.
Certain non-U.S. currencies may be particularly volatile, and non-U.S.
governments may intervene in the currency markets, causing a decline in value or
liquidity in the Fund's non-U.S. holdings whose value is tied to the affected
non-U.S. currency. Additionally, the prices of non-U.S. securities that are
traded in U.S. dollars are often indirectly influenced by currency
fluctuations.
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
15
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.
ENERGY
INFRASTRUCTURE COMPANIES RISK. The Fund invests significantly in
energy infrastructure companies. Energy infrastructure companies are subject to
risks specific to the energy and energy-related industries. This includes but is
not limited to: fluctuations in commodity prices impacting the volume of energy
commodities transported, processed, stored or distributed; reductions in volumes
of natural gas or other energy commodities being available for transporting,
processing, storing or distributing; slowdowns in new construction and
acquisitions limiting growth potential; reduced demand for oil, natural gas and
petroleum products, particularly for a sustained period of time; depletion of
natural gas reserves or other commodities; rising interest rates resulting in
higher costs of capital, increased operating costs and an inability to execute
acquisitions or expansion projects in a cost-effect manner; extreme weather
events and environmental hazards; and threats of attack by terrorists on energy
assets. In addition, energy infrastructure companies are subject to significant
federal, state and local government regulation in virtually every aspect of
their operations, including how facilities are constructed, maintained and
operated, environmental and safety controls, and the prices they may charge for
products and services. Energy infrastructure companies may also face
counterparty risk such that long term contracts may be declared void if the
counterparty to those contracts enters into bankruptcy proceedings. Energy
infrastructure companies that own interstate pipelines are subject to regulation
by U.S. Federal Energy Regulatory Commission ("FERC") with respect to the tariff rates
they may charge for transportation services. An adverse determination by FERC
with respect to the tariff rates of such a company could have a material adverse
effect on its business, financial condition, results of operations and cash
flows and its ability to pay cash distributions or dividends. Various
governmental authorities have the power to enforce compliance with these
regulations and the permits issued under them and violators are subject to
administrative, civil and criminal penalties, including civil fines, injunctions
or both. Stricter laws, regulations or enforcement policies could be enacted in
the future which would likely increase compliance costs and may adversely affect
the financial performance of energy infrastructure companies. Certain energy
infrastructure companies in the utilities industry are subject to the imposition
of rate caps, increased competition due to deregulation, the difficulty in
obtaining an adequate return on invested capital or in financing large
construction projects, the limitations on operations and increased costs and
delays attributable to environmental considerations, and the capital market’s
ability to absorb utility debt. In addition, taxes, government regulation,
international politics, price and supply fluctuations, volatile interest rates
and energy conservation may cause difficulties for these companies. Such issuers
have been experiencing certain of these problems to varying
degrees.
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.
16
FORWARD
CONTRACTS RISK. A
forward contract is an over-the-counter derivative transaction between two
parties to buy or sell a specified amount of an underlying reference at a
specified price (or rate) on a specified date in the future. Forward contracts
are negotiated on an individual basis and are not standardized or traded on
exchanges. The market for forward contracts is substantially unregulated and can
experience lengthy periods of illiquidity, unusually high trading volume and
other negative impacts, such as political intervention, which may result in
volatility or disruptions in such markets. A relatively small price movement in
a forward contract may result in substantial losses to the Fund, exceeding the
amount of the margin paid. Forward contracts can increase the Fund’s risk
exposure to underlying references and their attendant risks, such as credit
risk, currency risk, market risk, and interest rate risk, while also exposing
the Fund to counterparty risk, liquidity risk and valuation risk, among
others.
FUTURES
CONTRACTS RISK. The Fund
may invest in futures contracts. Futures contracts are typically exchange-traded
contracts that call for the future delivery of an asset by one party to another
at a certain price and date, or cash settlement of the terms of the contract.
The risk of a position in a futures contract may be very large compared to the
relatively low level of margin a Fund is required to deposit. In many cases, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required
margin deposit. The ability to establish and close out positions in futures
contracts is be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market on an exchange will
exist for any particular futures contract at any particular time. If a Fund uses
futures contracts for hedging purposes, there is a risk of imperfect correlation
between movements in the prices of the derivatives and movements in the
securities or index underlying the derivatives or movements in the prices of the
Fund's investments that are the subject of such hedge. The prices of futures
contracts, for a number of reasons, may not correlate perfectly with movements
in the securities or index underlying them. For example, participants in the
futures markets are subject to margin deposit requirements less onerous than
margin requirements in the securities markets in general. As a result, futures
markets may attract more speculators than the securities markets. Increased
participation by speculators in those markets may cause temporary price
distortions. Due to the possibility of price distortion, even a correct forecast
of general market trends by a Fund’s portfolio managers still may not result in
a successful derivatives activity over a very short time period. The Commodity
Futures Trading Commission and the various exchanges have established limits
referred to as “speculative position limits” on the maximum net long or net
short positions that any person and certain affiliated entities may hold or
control in a particular futures contract. It is possible that, as a result of
such limits, a Fund will be precluded from taking positions in certain futures
contracts it might have otherwise taken to the disadvantage of
shareholders.
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, the size of the Fund and the market volatility of
the Fund’s shares. Inclusion in an index could increase demand for the Fund and
removal from an index could result in outsized selling activity in a relatively
short period of time. As a result, the Fund’s net asset value could be
negatively impacted and the Fund’s market price may be below the Fund’s net
asset value during certain periods. In addition, index rebalances may
potentially result in increased trading activity. To the extent buying or
selling activity increases, the Fund can be exposed to increased brokerage costs
and adverse tax consequences and the market price of the Fund can be negatively
affected.
INFLATION
RISK.
Inflation risk is the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the present value of the Fund’s assets and distributions
may decline. This risk is more prevalent with respect to debt securities held by
the Fund. Inflation creates uncertainty over the future real value (after
inflation) of an investment. Inflation rates may change frequently and
drastically as a result of various factors, including unexpected shifts in the
domestic or global economy, and the Fund’s investments may not keep pace with
inflation, which may result in losses to Fund investors.
MANAGEMENT
RISK.
The Fund is subject to management risk because it is an actively managed
portfolio. In managing the Fund’s investment portfolio, the portfolio managers
will apply investment techniques and risk analyses that may not produce the
desired result. There can be no guarantee that the Fund will meet its investment
objective(s), meet relevant benchmarks or perform as well as other funds with
similar objectives.
MARKET
MAKER RISK. The Fund faces
numerous market trading risks, including the potential lack of an active market
for Fund shares due to a limited number of market markers. Decisions by market
makers or authorized participants to reduce their role or step away from these
activities in times of market stress could inhibit the effectiveness of the
arbitrage process in maintaining the relationship between the underlying values
of the Fund’s portfolio securities and the Fund’s market price. The Fund may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in
17
the
spread between the Fund’s net asset value and the price at which the Fund’s
shares are trading on the Exchange, which could result in a
decrease in value of the Fund’s shares. This reduced effectiveness could result
in Fund shares trading at a discount to net asset value and also in greater than
normal intraday bid-ask spreads for Fund shares.
MARKET
RISK. Market risk is the
risk that a particular security, or shares of the Fund in general, may fall in
value. Securities are subject to market fluctuations caused by such factors as
economic, political, regulatory or market developments, changes in interest
rates and perceived trends in securities prices. Shares of the Fund could
decline in value or underperform other investments due to short-term market
movements or any longer periods during more prolonged market downturns. In
addition, local, regional or global events such as war, acts of terrorism,
spread of infectious diseases or other public health issues, recessions, or
other events could have a significant negative impact on the Fund and its
investments. For example, the coronavirus disease 2019 (COVID-19) global
pandemic and the 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. 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.
MLP
RISK. Investments in
securities of MLPs involve certain risks different from or in addition to the
risks of investing in common stocks, including for example risks related to the
limited ability of investors to control an MLP and to vote on matters affecting
the MLP, risks related to potential conflicts of interest between an MLP and the
MLP's general partner, the risk that an MLP will generate insufficient cash flow
to meet its current operating requirements, the risk that an MLP will issue
additional securities or engage in other transactions that will have the effect
of diluting the interests of existing investors, and risks related to the
general partner's right to require investors to sell their common units at an
undesirable time or price. MLP common units can be affected by macro-economic
and other factors affecting the stock market in general, changes or anticipated
changes in interest rates, investor sentiment towards MLPs or the energy sector
generally, changes in a particular issuer's financial condition, or unfavorable
or unanticipated poor performance of a particular issuer (in the case of MLPs,
generally measured in terms of distributable cash flow). Prices of common units
of individual MLPs also can be affected by other factors unique to the
partnership or company, including earnings power and coverage ratios. Certain
MLP securities may trade in relatively low volumes due to their smaller
capitalizations or other factors, which may cause them to have a high degree of
price volatility and lack sufficient market liquidity to enable the Fund to
effect a sale at an advantageous time or price. Because many MLPs pay out most
of their operating cash flows, the MLPs rely on capital markets for access to
equity and debt financing to fund growth through organization. If market
conditions limit an MLPs access to capital markets, the MLPs growth prospects
could diminish and its costs of capital increase, which would decrease the value
of the common units held by the Fund. MLPs are now a higher cost way of
financing these industries; the reverse of the conditions that led to the growth
of the asset class in the early part of the last decade. As a result, the
industry is witnessing the consolidation or simplification of corporate
structures where the MLP sleeve of capital is being eliminated because it no
longer reduces a company’s cost of equity financing. Even for MLPs that have
avoided exposure to commodity prices and have been successful in growing their
dividends, the cost of the MLP structure has risen due to growing incentive
payments to the general partner. These incentives increase with per share
dividend growth at the limited partnership level and are due on newly issued
shares, as well as older shares that have experienced the growth. As a result,
the more successful the MLP is in growing its dividends, the closer it gets to
paying incentives to the parent/general partner that are more onerous than a tax
at the corporate level. The lower the corporate tax rate, the sooner this
threshold is crossed. In many cases, MLPs are merely a part of the corporate
finance structure of a company. MLPs are created when they lower the cost of
equity financing and are no longer used when they do not. MLPs that own
interstate pipelines are subject to FERC regulation with respect to tariffs
charged and received an adverse decision.
MLP
TAX RISK. The Fund’s ability
to meet its investment objective relies in part upon the level of taxable income
it receives from the MLPs in which it invests, a factor over which the Fund has
no control. The benefit the Fund derives from its investment in MLPs is largely
dependent on their being treated as partnerships for U.S. federal income tax
purposes. Partnerships do not pay U.S. federal income tax at the partnership
level. Rather, each partner is allocated a share of the partnership’s income,
gains, losses, deductions and expenses. A change in current tax law or a change
in the underlying business mix of a given MLP could result in an MLP being
treated as a corporation for U.S. federal income tax purposes, which would
result in the MLP being required to pay U.S. federal income tax (as well as
state and local income taxes) on its taxable income at the applicable
18
corporate
tax rate. This would have the effect of reducing the amount of cash available
for distribution by an MLP and could result in a
significant reduction in the value of the Fund’s investment. The classification
of an MLP as a corporation for U. S. federal income tax purposes would have the
effect of reducing the amount of cash available for distribution by the MLP and
causing any such distributions received by the Fund to be taxed as dividend
income to the extent of the MLP’s current or accumulated earnings and profits.
To the extent a distribution received by the Fund from an MLP is treated as a
return of capital, the Fund’s adjusted tax basis in the interests of the MLP may
be reduced, which will result in an increase in the amount of income or gain (or
decrease in the amount of loss) that will be recognized by the Fund for tax
purposes upon the sale of any such interests or upon subsequent distributions in
respect of such interests. Furthermore, any return of capital distribution
received from an MLP may require the Fund to restate the character of its
distributions and amend any shareholder tax reporting previously
issued.
NON-DIVERSIFICATION
RISK. As
a “non-diversified” fund, the Fund may hold a smaller number of portfolio
securities than many other funds and may be more sensitive to any single
economic, business, political or regulatory occurrence than a diversified fund.
To the extent the Fund invests in a relatively small number of issuers due to
the high percentage of the Fund’s assets invested in that security, a decline in
the market value of a particular security held by the Fund may affect its value
more than if it invested in a larger number of issuers. The value of the Fund’s
shares may be more volatile than the values of shares of more diversified
funds.
NON-U.S.
SECURITIES RISK. The Fund may invest
in non-U.S. securities. An investment in securities of non-U.S. companies
involves risks not associated with domestic issuers. Investment in non-U.S.
securities may involve higher costs than investment in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by non-U.S. governments. Non-U.S. investments may also involve
risks associated with the level of currency exchange rates, less complete
financial information about the issuers, less market liquidity, more market
volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of non-U.S. holdings, the imposition of
sanctions by foreign governments, the possible establishment of capital
controls, exchange controls or freezes on the convertibility of currency or the
adoption of other governmental restrictions might adversely affect an investment
in non-U.S. securities. Additionally, non-U.S. issuers may be subject to less
stringent regulation, and to different accounting, auditing and recordkeeping
requirements. The U.S. and non-U.S. markets often rise and fall at different
times or by different amounts due to economic or other regional developments
particular to a given country or region.
OPERATIONAL
RISK. The Fund is
subject to risks arising from various operational factors, including, but not
limited to, human error, processing and communication errors, errors of the
Fund’s service providers, counterparties or other third-parties, failed or
inadequate processes and technology or systems failures. The Fund relies on
third-parties for a range of services, including custody. Any delay or failure
relating to engaging or maintaining such service providers may affect the Fund’s
ability to meet its investment objective. Although the Fund and the Fund’s
investment advisor seek to reduce these operational risks through controls and
procedures, there is no way to completely protect against such
risks.
OPTIONS
RISK. The use of options
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions and depends on the ability of the
portfolio managers to forecast market movements correctly. The prices of options
are volatile and 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. The effective use of options also depends on the ability to
terminate option positions at times deemed desirable to do so. There is no
assurance that the 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.
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
19
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.
SIGNIFICANT
EXPOSURE RISK. To the
extent that the Fund invests a significant percentage of its assets in a single
asset class or the securities of issuers within the same country, state, region,
industry or sector, an adverse economic, business or political development that
affected a particular asset class, region or industry may affect the value of
the Fund’s investments more than if the Fund were more broadly diversified. A
significant exposure makes the Fund more susceptible to any single occurrence
and may subject the Fund to greater volatility and market risk than a fund that
is more broadly diversified.
SMALLER
COMPANIES RISK. The Fund invests in
the securities of small and/or mid capitalization companies. The stock price of
small and/or mid capitalization companies may be more volatile than those of
larger companies and therefore the Fund’s share price may be more volatile than
those of funds that invest a larger percentage of their assets in stocks issued
by large capitalization companies. Stock prices of small and/or mid
capitalization companies are also generally more vulnerable than those of large
capitalization companies to adverse business and economic developments.
Securities of small and/or mid capitalization companies may be thinly traded,
making it difficult for the Fund to buy and sell them. In addition, small and/or
mid capitalization companies are typically less financially stable than larger,
more established companies and may reinvest a high proportion of their earnings
in their business and may not pay dividends. Small and/or mid capitalization
companies may also depend on a small number of essential personnel who may also
be less experienced than the management of larger companies, making these
companies more vulnerable to experiencing adverse effects due to the loss or
inexperience of personnel. Small and/or mid capitalization companies also
normally have less diverse product lines than those of large capitalization
companies and are more susceptible to adverse developments concerning their
products.
SWAP
AGREEMENTS RISK. The
Fund may enter in swap agreements. Swap agreements are two-party contracts
entered into for a set period of time in which the parties agree to exchange
payments based on some underlying reference or asset (such as interest rates).
The use of swaps is a highly specialized activity that involves investment
techniques, risk analyses and tax planning different from those associated with
ordinary portfolio securities transactions. These transactions can result in
sizeable realized and unrealized capital gains and losses relative to the gains
and losses from the Fund’s direct investments in the reference assets.
Transactions in swaps can involve greater risks than if the Fund had invested
directly in the reference asset since, in addition to general market risks,
swaps may be leveraged and are also subject to credit risk, counterparty risk,
liquidity risk and valuation risk. Because they are two-party contracts and may
have terms of greater than seven days, certain swap transactions may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap counterparty. Some swaps may be complex and
difficult to value. Swaps may also be subject to pricing or “basis” risk, which
exists when a particular swap becomes extraordinarily expensive relative to
historical prices or the price of corresponding cash market instruments. Under
certain market conditions it may not be economically feasible to initiate a
transaction or liquidate a position in time to avoid a loss or take advantage of
an opportunity. If a swap transaction is particularly large or if the relevant
market is illiquid, it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price, which may result in
significant losses. The prices of swaps can be very volatile, and a variance in
the degree of volatility or in the direction of the price of the reference asset
from the sub-adviser’s expectations may produce significant losses in the Fund’s
investments in swaps. In addition, a perfect correlation between a swap and an
investment position may be impossible to achieve. As a result, the Fund’s use of
swaps may not be effective in fulfilling the Fund’s investment strategies and
may contribute to losses that would not have been incurred otherwise. Certain
swaps are not bilateral agreements but are centrally-cleared and are
exchange-traded. Central clearing tends to decrease credit risk and improve
liquidity but many regulations regarding centrally-cleared swaps have not been
fully implemented and the scope of the risks remain unclear. As central clearing
does not make the agreements risk-free and there is no guarantee that the Fund
would consider all centrally-cleared or exchange-traded swaps to be
liquid.
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.
UTILITY
COMPANIES RISK. The Fund invests
significantly in utility companies. Utility companies include companies
producing or providing gas, electricity or water. The risks inherent in the
utility sector include a variety of factors that may adversely
20
affect
the business or operations of utility companies, including: high interest costs
associated with capital construction and improvement programs;
difficulty in raising adequate capital on reasonable terms in periods of high
inflation and unsettled capital markets; governmental regulation of rates that
the issuer can charge to customers; costs associated with compliance with, and
adjusting to changes to, environmental and other regulations; counterparty risk;
effects of economic slowdowns and surplus capacity; increased competition from
other providers of utility services; costs associated with the reduced
availability of certain types of fuel, occasionally reduced availability and
high costs of natural gas for resale, and the effects of energy conservation
policies. Some utility companies also face risks associated with the effects of
a national energy policy and lengthy delays, and greatly increased costs and
other problems, associated with the design, construction, licensing, regulation
and operation of nuclear facilities for electric generation, including, among
other considerations: the problems associated with the use of radioactive
materials and the disposal of radioactive wastes; technological innovations that
may render existing plants, equipment or products obsolete; difficulty in
obtaining regulatory approval of new technologies; lack of compatibility of
telecommunications equipment; potential impacts of terrorist activities on the
utility industry and its customers; and the impact of natural or man-made
disasters. Utility companies may also be subject to regulation by various
governmental authorities and may be affected by the imposition of special
tariffs and changes in tax laws, regulatory policies and accounting standards.
Deregulation is subjecting utility companies to greater competition and may
adversely affect profitability. As deregulation allows utility companies to
diversify outside of their original geographic regions and their traditional
lines of business, utility companies may engage in riskier ventures. There is no
assurance that regulatory authorities will, in the future, grant rate increases,
or that such increases will be adequate to permit the payment of dividends on
stocks issued by a utility company.
Non-Principal
Risks
BORROWING
AND LEVERAGE RISK. If
the Fund borrows money, it must pay interest and other fees, which may reduce
the Fund’s returns. Any such borrowings are intended to be temporary. However,
under certain market conditions, including periods of decreased liquidity, such
borrowings might be outstanding for longer periods of time. As prescribed by the
1940 Act, the Fund will be required to maintain specified asset coverage of at
least 300% with respect to any bank borrowing immediately following such
borrowing and at all times thereafter. The Fund may be required to dispose of
assets on unfavorable terms if market fluctuations or other factors reduce the
Fund’s asset coverage to less than the prescribed amount.
CASH
TRANSACTIONS RISK. The
Fund may, under certain circumstances, effect a portion of creations and
redemptions for cash, rather than in-kind securities. 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.
DEFERRED
TAX RISK. As a limited partner
in the MLPs in which it invests, the Fund will be allocated its pro rata share
of income, gains, losses, deductions and expenses from the MLPs. A significant
portion of MLP income has historically been offset by tax deductions. The Fund
will recognize income with respect to that portion of a distribution that is not
offset by tax deductions, with the remaining portion of the distribution being
treated as a tax-deferred return of capital. The percentage of an MLP’s
distribution which is offset by tax deductions will fluctuate over time for
various reasons. A significant slowdown in acquisition or investment activity by
MLPs held in the Fund’s portfolio could result in a reduction of accelerated
depreciation or other deductions generated by these activities, which may result
in increased net income to the Fund. A reduction in the percentage of the income
from an MLP offset by tax deductions or gains as a result of the sale of
portfolio securities will reduce that portion, if any, of the Fund’s
distribution treated as a tax-deferred return of capital and increase that
portion treated as dividend income, resulting in lower after-tax distributions
to the Fund’s shareholders. The Fund will rely to some extent on information
provided by MLPs, which is usually not timely, to determine the tax character of
the distributions to shareholders.
21
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.
DEPOSITARY
RECEIPTS RISK. The Fund invests in
depositary receipts. Depository receipts are securities issued by a bank or
trust company reflecting ownership of underlying securities issued by a foreign
company. An investment in depositary receipts involves further risks due to
certain unique features. Any distributions paid to the holders of depositary
receipts are usually subject to a fee charged by the depositary. Holders of
depositary receipts may have limited voting rights pursuant to a deposit
agreement between the underlying issuer and the depositary. In certain cases,
the depositary will vote the shares deposited with it as directed by the
underlying issuer’s board of directors. Furthermore, investment restrictions in
certain countries may adversely impact the value of depositary receipts because
such restrictions may limit the ability to convert shares into depositary
receipts and vice versa. Such restrictions may cause shares of the underlying
issuer to trade at a discount or premium to the market price of the depositary
receipt. Moreover, if depositary receipts are converted into shares, the laws in
certain countries may limit the ability of a non-resident to trade the shares
and to reconvert the shares to depositary receipts. Depositary receipts may be
“sponsored” or “unsponsored.” Sponsored depositary receipts are established
jointly by a depositary and the underlying issuer, whereas unsponsored
depositary receipts may be established by a depositary without participation by
the underlying issuer. Holders of unsponsored depositary receipts generally bear
all the costs associated with establishing the unsponsored depositary receipts.
In addition, the issuers of the securities underlying unsponsored depositary
receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the depositary receipts.
EUROPE
RISK. The Fund may invest
in the securities of European issuers. Therefore, in addition to the risks
associated with investments in non-U.S. securities generally, the Fund is
subject to certain risks associated specifically with investments in securities
of European issuers. Political or economic disruptions in European countries,
even in countries in which the Fund is not invested, may adversely affect
security values and thus the Fund’s holdings. A significant number of countries
in Europe are member states in the EU, and the member states no longer control
their own monetary policies by directing independent interest rates for their
currencies. In these member states, the authority to direct monetary policies,
including money supply and official interest rates for the Euro, is exercised by
the European Central Bank. In a 2016 referendum, the United Kingdom elected to
withdraw from the EU. After years of negotiations between the United Kingdom and
the EU, a withdrawal agreement was reached whereby the United Kingdom formally
left the EU. As the second largest economy among EU members, the implications of
the United Kingdom’s withdrawal are difficult to gauge and cannot be fully
known. Trade between the United Kingdom and the EU is highly integrated through
supply chains and trade in services, as well as through multinational companies.
The United Kingdom’s departure may negatively impact the EU and Europe as a
whole by causing volatility within the EU, triggering prolonged economic
downturns in certain European countries or sparking additional member states to
contemplate departing the EU (thereby perpetuating political instability in the
region).
FAILURE
TO QUALIFY AS A REGULATED INVESTMENT COMPANY RISK. If, in any year, the Fund fails to
qualify as a regulated investment company under the applicable tax laws, the
Fund would be taxed as an ordinary corporation. In such circumstances, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying as a regulated
investment company that is accorded special tax treatment.
INTERNATIONAL
CLOSED MARKET TRADING RISK. Because securities
held by the Fund may trade on non-U.S. exchanges that are closed when the Fund's
primary listing exchange is open, there are likely to be deviations between the
current price of an underlying security and the last quoted price for the
underlying security (i.e., the Fund’s quote
from the closed foreign market), resulting in premiums or discounts to the
Fund's net asset value that may be greater than those experienced by other
exchange-traded funds. However, because shares can be created and redeemed in
Creation Units at a Fund's net asset value, it is not expected that large
discounts or premiums to the net asset value of the Fund will be sustained over
the long term (unlike shares of many closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net asset
values).
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
22
the
securities. Such legislation or litigation may cause the Fund to lose value or
may result in higher portfolio turnover if the Advisor determines to
sell such a holding.
Fund
Organization
The
Fund is a series of the Trust, an investment company registered under the 1940
Act. The Fund is treated as a separate fund with its own
investment objective 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, 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 overseeing the Sub-Advisor in the investment of the Fund’s
assets, managing the Fund’s business affairs and providing certain clerical,
bookkeeping and other administrative services.
First
Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace
Partners of DuPage L.P. is a limited partnership with one general partner, The
Charger Corporation, and a number of limited partners. The Charger Corporation
is an Illinois corporation controlled by James A. Bowen, the Chief Executive
Officer of First Trust. First Trust discharges its responsibilities subject to
the policies of the Board.
First Trust serves
as advisor or sub-advisor to 8 mutual fund portfolios, 10 exchange-traded funds
consisting of 193 series
and 16 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 Energy Income Partners, LLC located
at 10 Wright Street, Westport, Connecticut 06880 to serve
as the Fund’s investment sub-advisor pursuant to an investment sub-advisory
agreement (the "Sub-Advisory
Agreement"). In this
capacity, Energy Income Partners is responsible for the selection and on-going
monitoring of the securities in the Fund’s investment portfolio. Energy Income
Partners is a registered investment advisor founded in October 2003 by James J.
Murchie, Eva Pao and Linda Longville to provide professional asset management
services in the area of high-payout securities in the energy infrastructure
sector. In addition to serving as Sub-Advisor to the Fund, Energy Income
Partners serves as the investment manager to two privately placed funds, one
registered investment company, separately managed accounts and provides a model
portfolio to unified managed accounts. Energy Income Partners also serves as the
sub-advisor to the First Trust Energy Income and Growth Fund (NYSE: FEN); First
Trust Energy Infrastructure Fund (NYSE: FIF); First Trust MLP and Energy Income
Fund (NYSE: FEI); a sleeve of First Trust Strategic Income ETF (Nasdaq: FDIV);
First Trust New Opportunities MLP & Energy Fund (NYSE: FPL); an actively
managed ETF, First Trust EIP Carbon Impact ETF (NYSE Arca: ECLN) and a sleeve of
First Trust Multi-Income Allocation Portfolio of the First Trust Variable
Insurance Trust. Energy Income Partners mainly focuses on portfolio companies
that operate infrastructure assets such as pipelines, storage and terminals that
receive fee-based or regulated income from their customers. As of January 31,
2022, Energy Income Partners served as investment advisor to investment
portfolios with $4.3 billion in assets. First Trust Capital Partners, LLC, an
affiliate of First Trust, owns, through a wholly-owned subsidiary, a 15%
ownership interest in each of the Energy Income Partners and EIP Partners, LLC,
a Delaware limited liability company and affiliate of Energy Income
Partners.
James
J. Murchie, Eva Pao and John K. Tysseland are the Fund’s portfolio managers and
are jointly and primarily responsible for the day-to-day
management of the Fund’s investment portfolio.
•
James J. Murchie is a
Co-Founder, Chief Executive Officer, Co-Portfolio Manager and a Principal of
Energy Income Partners. After founding Energy Income Partners in October 2003,
Mr. Murchie and the Energy Income Partners investment team joined Pequot Capital
Management Inc. (“Pequot
Capital”) in December 2004.
In August 2006, Mr. Murchie and the Energy Income Partners investment team left
Pequot Capital and re-established Energy Income Partners. Prior to founding
Energy Income Partners, Mr. Murchie was a Portfolio Manager at Lawhill Capital
Partners, LLC (“Lawhill
Capital”), a long/short
equity hedge fund investing in commodities and equities in the energy and basic
industry sectors. Before Lawhill Capital, Mr. Murchie was a Managing Director at
Tiger Management, LLC, where his primary responsibility was managing a portfolio
of investments in commodities
23
and
related equities. Mr. Murchie was also a Principal at Sanford C. Bernstein. He
began his career at British Petroleum, PLC. Mr.
Murchie holds a BA in history and anthropology from Rice University and received
his MA from Harvard University.
•
Eva Pao is a
Co-Founder, Co-Portfolio Manager and Principal of Energy Income Partners. She is
a Co-founder of Energy Income Partners since inception in 2003. From 2005 to
mid-2006, Ms. Pao joined Pequot Capital Management during Energy Income
Partners’ affiliation with Pequot. Prior to Harvard Business School, Ms. Pao was
a Manager at Enron Corp where she managed a portfolio in Canadian oil and gas
equities for Enron’s internal hedge fund that specialized in energy-related
equities and managed a natural gas trading book. Ms. Pao received her
undergraduate degree at Rice University and received her MBA from Harvard
Business School.
•
John K. Tysseland is
a Co-Portfolio Manager and Principal of Energy Income Partners. Prior to joining
Energy Income Partners, Mr. Tysseland worked at Citi Research most currently
serving as a Managing Director where he covered midstream energy companies and
MLPs. From 1998 to 2005, he worked at Raymond James & Associates as a Vice
President who covered the oilfield service industry and established the firm’s
initial coverage of MLPs in 2001. Prior to that, he was an Equity Trader at
Momentum Securities from 1997 to 1998 and an Assistant Executive Director at
Sumar Enterprises from 1996 to 1997. Mr. Tysseland graduated from The University
of Texas at Austin with a BA in economics.
For
additional information concerning First Trust, the Sub-Advisor and the portfolio
managers, 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 securities 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 Energy Income Partners’ management of the Fund’s assets and
pays Energy Income Partners for its services as Sub-Advisor. First Trust is paid
an annual unitary management fee by the Fund equal to 0.95% of the Fund's
average daily net assets and is responsible for the Fund's expenses, including the cost of transfer
agency, custody, fund administration, legal, audit and other services, but
excluding fee payments under the Investment Management Agreement, interest,
taxes, acquired fund fees and expenses, if any, brokerage commissions and other
expenses connected with the execution of portfolio transactions, distribution
and service fees payable pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses.
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, 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.
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.
24
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, or otherwise not in the Fund's best
interests.
Dividends,
Distributions and Taxes
Dividends
from net investment income from the Fund, if any, are declared and paid
quarterly by the Fund. The Fund distributes its net realized
capital gains, if any, to shareholders at least annually.
Due
to the tax treatment under current law of cash distributions made by MLPs in
which the Fund invests, a portion of the distributions the
Fund anticipates making may consist of tax-deferred return of capital. To the
extent that distributions exceed such Fund’s earnings and profits, distributions
are generally not treated as taxable income for the investor. Instead, Fund
shareholders will experience a reduction in the basis of their shares, which may
increase the capital gain or reduce capital loss, realized upon the sale of such
shares. Thus, if the Fund’s capital was the source of a distribution and the
payment amounted to a return of capital, the Fund would be required to provide a
written notice to that effect. A “return of capital” represents a return on a
shareholder’s original investment in the Fund, and should not be confused with a
dividend from earnings and profits. Upon the sale of Fund shares, shareholders
generally will recognize capital gain or loss measured by the difference between
the sale proceeds received by the shareholder and the shareholder’s federal
income tax basis in shares sold, as adjusted to reflect return of
capital.
25
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. An adverse federal income tax
audit of a partnership that the Fund invests in could result in the Fund being
required to pay federal income tax or pay a deficiency dividend (without having
received additional cash).
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 a Fund’s dividend yield or total
return of an investment in Fund shares. The tax status of your distributions
from the Fund is not affected by whether you reinvest your distributions in
additional shares or receive them in cash. The income from the Fund that you
must take into account for federal income tax purposes is not reduced by amounts
used to pay a deferred sales fee, if any. The tax laws may require you to treat
distributions made to you in January as if you had received them on December 31
of the previous year.
Income
from the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally
applies to your net investment income if your adjusted
gross income exceeds certain threshold amounts, which are $250,000 in the case
of married couples filing joint returns and $200,000 in the case of single
individuals.
Dividends
Received Deduction
A
corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. 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.
26
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. Some portion of your capital gain dividends may be attributable to the
Fund’s interest in a master limited partnership which may be subject to a
maximum marginal stated federal tax rate of 28%, rather than the rates set forth
above. In the case of capital gain dividends, the determination of which portion
of the capital gain dividend, if any, is subject to the 28% 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 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.
Ordinary
income dividends received by an individual shareholder from a regulated
investment company such as the Fund are generally taxed at
the same rates that apply to net capital gain (as discussed above), provided
certain holding period requirements are satisfied and provided the dividends are
attributable to qualifying dividends received by the Fund itself. The Fund will
provide notice to its shareholders of the amount of any distribution which may
be taken into account as a dividend which is eligible for the capital gains tax
rates.
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. 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.
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
27
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.
Investments
in Certain Non-U.S. Corporations
If
the Fund holds an equity interest in any passive foreign investment companies,
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 passive foreign investment company
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
passive foreign investment companies and its proceeds from dispositions of
passive foreign investment company 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 passive foreign
investment companies 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, 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
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.
28
The
Fund’s investments are valued daily in accordance with valuation procedures
adopted by the Board, and in accordance with provisions of
the 1940 Act. Certain securities in which the Fund may invest are not listed on
any securities exchange or board of trade. Such securities are typically bought
and sold by institutional investors in individually negotiated private
transactions that function in many respects like an over the counter secondary
market, although typically no formal market makers exist. Certain securities,
particularly debt securities, have few or no trades, or trade infrequently, and
information regarding a specific security may not be widely available or may be
incomplete. Accordingly, determinations of the fair value of debt securities may
be based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of debt securities than for other types of securities. Typically, debt
securities are valued using information provided by a third-party pricing
service. The third-party pricing service primarily uses broker quotes to value
the securities.
The Fund's investments are valued daily at
market value or, in the absence of market value with respect to any portfolio
securities, at fair value, in accordance with valuation procedures 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. 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 the determination.
Net asset value may change on days when investors may not sell or redeem Fund
shares.
Certain securities
may not be able to be priced by pre-established pricing methods. Such securities
may be valued by the Board or its delegate, the Advisor’s
Pricing Committee, at fair value. The use of fair value pricing by the Fund is
governed by valuation procedures adopted by the Board and in accordance with the
provisions of the 1940 Act. These securities generally include, but are not
limited to, certain restricted securities (securities which may not be publicly
sold without registration under the Securities Act) for which a pricing service
is unable to provide a market price; securities whose trading has been formally
suspended; a security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's net asset value or
make it difficult or impossible to obtain a reliable market quotation; and a
security whose price, as provided by the pricing service, does not reflect the
security’s “fair value.” As a general principle, the current “fair value” of a
security would appear to be the amount which the owner might reasonably expect
to receive for the security upon its current sale. When fair value prices are
used, generally they will differ from the current market valuations. See the
Fund's SAI for details.
Because
foreign securities exchanges may be open on different days than the days during
which an investor may purchase or sell shares of the
Fund, the value of the Fund's securities may change on days when investors are
not able to purchase or sell shares of the Fund. The value of securities
denominated in foreign currencies is converted into U.S. dollars at the exchange
rates in effect at the time of valuation.
Fund
Service Providers
The Bank of New York
Mellon, 240 Greenwich Street, New York, New York 10286, acts as the
administrator, custodian and fund accounting and transfer agent
for the Fund. Chapman and Cutler LLP, 320 S. Canal St., Chicago, Illinois 60606,
serves as legal counsel to the Fund.
Premium/Discount
Information
Information
showing the number of days the market price of the Fund's shares was greater (at
a premium) and less (at a discount) than the Fund's net
asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter),
is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
29
Total
Return Information
The
table below compares the total return of the Fund to a broad-based market index
and a blended benchmark. The information presented for the
Fund is for the period indicated.
“Average annual
total returns” represent the average annual change in the value of an investment
over the period indicated. “Cumulative total returns” represent
the total change in value of an investment over the period indicated. The return
information shown under “Annual Total Return” in the Fund’s summary prospectus
represents the average annual total returns of the Fund as of the calendar year
end, while the information presented below is as of the Fund’s fiscal year end.
The net asset value per share of the Fund is the value of one share of the Fund
and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less liabilities (including accrued expenses
and dividends declared but unpaid), by the total number of outstanding shares.
The net asset value return is based on the net asset value per share of the Fund
and the market return is based on the market price per share of the Fund. The
price used to calculate market return (“Market
Price”) is determined by
using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s net
asset value is calculated. Under SEC rules, the NBBO consists of the highest
displayed buy and lowest sell prices among the various exchanges trading the
Fund at the time the Fund's net asset value is calculated. Prior to January 1,
2019, the price used was the midpoint between the highest bid and the lowest
offer on the stock exchange on which shares of the Fund were listed for trading
as of the time that the Fund's net asset value was calculated. Since the shares
of the Fund typically do not trade in the secondary market until after the
Fund's inception, for the period from inception to the first day of secondary
market trading in shares of the Fund, the 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.
First
Trust North American Energy Infrastructure Fund (EMLP)
Total Returns as of October 31, 2021
Total Returns as of October 31, 2021
|
|
|
Average
Annual |
Cumulative | ||
|
|
1
Year |
5
Years |
Inception
(6/20/2012) |
5
Years |
Inception
(6/20/2012) |
|
Fund
Performance |
|
|
|
|
|
|
Net Asset
Value |
31.97% |
4.43% |
6.35% |
24.21% |
77.98% |
|
Market
Price |
32.14% |
4.43% |
6.36% |
24.20% |
78.10% |
|
Index
Performance |
|
|
|
|
|
|
Blended
Benchmark(1)
|
45.60% |
6.80% |
6.60% |
38.97% |
81.90% |
|
S&P
500®
Index |
42.91% |
18.93% |
16.24% |
137.90% |
309.38% |
(1)
The
Blended Benchmark consists of the following two indices: 50% of the PHLX Utility
Sector Index, which is a market capitalization-weighted index composed of
geographically diverse public U.S. utility stocks; and 50% of the Alerian MLP
Total Return Index which is a float-adjusted, capitalization-weighted composite
of the most prominent energy MLPs. The Blended Benchmark returns are calculated
by using the monthly return of the two indices during each period shown above.
At the beginning of each month the two indices are rebalanced to a 50-50 ratio
to account for divergence from that ratio that occurred during the course of
each month. The monthly returns are then compounded for each period shown above,
giving the performance for the Blended Benchmark for each period shown
above.
30
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the periods shown. Certain information reflects financial
results for a single share of the Fund. The total returns represent the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). The information for
the periods indicated has been derived from financial statements audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report to Shareholders dated
October 31, 2021 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
First
Trust North American Energy Infrastructure Fund (EMLP)
|
|
Year
Ended October 31, | ||||
|
|
2021 |
2020 |
2019 |
2018 |
2017 |
|
Net
asset value, beginning of period |
$19.68 |
$24.83 |
$22.64 |
$24.55 |
$24.76 |
|
Income
from investment operations: |
|
|
|
|
|
|
Net
investment income (loss) |
0.19 |
0.20 |
0.36 |
0.35 |
0.44 |
|
Net
realized and unrealized gain (loss) |
6.01 |
(4.33) |
2.81 |
(1.33) |
0.32 |
|
Total
from investment operations |
6.20 |
(4.13) |
3.17 |
(0.98) |
0.76 |
|
Distributions
paid to shareholders from: |
|
|
|
|
|
|
Net
investment income |
(0.86) |
(0.70) |
(0.29) |
(0.45) |
(0.48) |
|
Return of
capital |
— |
(0.32) |
(0.69) |
(0.48) |
(0.49) |
|
Total
distributions |
(0.86) |
(1.02) |
(0.98) |
(0.93) |
(0.97) |
|
Net
asset value, end of period |
$25.02 |
$19.68 |
$24.83 |
$22.64 |
$24.55 |
|
Total
Return (a) |
31.97% |
(16.69)% |
14.22% |
(4.03)% |
3.06% |
|
Ratios/supplemental
data: |
|
|
|
|
|
|
Net
assets, end of period (in 000’s) |
$2,129,135 |
$1,687,897 |
$2,565,360 |
$2,117,805 |
$1,910,977 |
|
Ratios
to average net assets: |
|
|
|
|
|
|
Ratio of
total expenses to average net assets |
0.95% |
0.95% |
0.95% |
0.95% |
0.95% |
|
Ratio of
net investment income (loss) to average net
assets |
0.71% |
1.13% |
1.52% |
1.40% |
1.59% |
|
Portfolio
turnover rate (b)
|
52% |
46% |
33% |
35% |
24% |
(a)
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.
(b)
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.
31
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.
32
|
First
Trust
Exchange-Traded
Fund IV |
First Trust North American Energy Infrastructure Fund
For
More Information
For
more detailed information on the Fund, several additional sources of information
are available to you. The SAI, incorporated by
reference into this prospectus, contains detailed information on the Fund's
policies and operation. Additional information about the Fund's investments is
available in the annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund's performance during
the last fiscal year. The Fund's most recent SAI, annual and semi-annual reports
and certain other information are available free of charge by calling the Fund
at (800) 621-1675, on the Fund's website at www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You may obtain
this and other information regarding the Fund, including the SAI and the Codes
of Ethics adopted by
First Trust, FTP and the Trust, directly from the Securities and Exchange
Commission (the "SEC"). Information on the SEC’s website
is free of charge. Visit the SEC’s online EDGAR database at
www.sec.gov. You may also request information
regarding the Fund by sending a request (along with a duplication fee) to the
SEC by sending an electronic request to
[email protected].
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC
File #: 333-174332
811-22559
811-22559