|
First
Trust
Exchange-Traded
Fund |
Prospectus
First Trust Growth
Strength ETF
|
Ticker
Symbol: |
FTGS |
|
Exchange: |
The
Nasdaq Stock Market LLC |
First
Trust Growth Strength ETF (the “Fund”) lists and
principally trades its shares on The Nasdaq Stock Market LLC ("Nasdaq" or the "Exchange"). Market prices may
differ to some degree from the net asset value of the shares. Unlike mutual
funds, the Fund issues and redeems shares at net asset value, only in large
blocks of shares called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund (the “Trust”) and an
exchange-traded index fund organized as a separate series of a registered
management investment company.
Except
when aggregated in Creation Units, the shares are not redeemable securities of
the Fund.
The
Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
NOT
FDIC INSURED MAY
LOSE VALUE NO
BANK GUARANTEE
May 1,
2023
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)
|
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
Management
Investment
Advisor
First
Trust Advisors L.P. (“First
Trust”
or the “Advisor”)
7
Portfolio
Managers
The
Fund’s portfolio is managed by a team (the “Investment
Committee”) consisting
of:
•
Daniel J. Lindquist,
Chairman of the Investment Committee and Managing Director of First
Trust
•
David G. McGarel,
Chief Investment Officer, Chief Operating Officer and Managing Director of First
Trust
•
Jon C. Erickson, Senior Vice
President of First Trust
•
Roger F. Testin,
Senior Vice President of First Trust
•
Stan Ueland, Senior
Vice President of First Trust
•
Chris A. Peterson,
Senior Vice President of First Trust
•
Erik Russo, Vice
President of First Trust
The
Investment Committee members are primarily and jointly responsible for the
day-to-day management of the Fund. Each Investment
Committee member has served as a part of the portfolio management team of the
Fund since October 2022.
Purchase
and Sale of Fund Shares
The
Fund issues and redeems shares on a continuous basis, at net asset value, only
in large blocks of shares called “Creation Units.” Individual
shares of the Fund may only be purchased and sold on the secondary market
through a broker-dealer. Since shares of the Fund trade on securities exchanges
in the secondary market at their market price rather than their net asset value,
the Fund’s shares may trade at a price greater than (premium) or less than
(discount) the Fund’s net asset value. An investor may incur costs attributable
to the difference between the highest price a buyer is willing to pay to
purchase shares of the Fund (bid) and the lowest price a seller is willing to
accept for shares of the Fund (ask) when buying or selling shares in the
secondary market (the “bid-ask
spread”). Recent
information, including the Fund’s net asset value, market price, premiums and
discounts, bid-ask spreads and the median bid-ask spread for the Fund’s most
recent fiscal year, is available online at
https://www.ftportfolios.com/Retail/etf/home.aspx.
Tax
Information
The
Fund’s distributions are taxable and will generally be taxed as ordinary income
or capital gains. Distributions on shares held in a
tax-deferred account, while not immediately taxable, will be subject to tax when
the shares are no longer held in a tax-deferred account.
Payments
to Broker-Dealers and Other Financial Intermediaries
If you purchase
shares of the Fund through a broker-dealer, registered investment adviser, bank
or other financial intermediary (collectively, “intermediaries”), First Trust and
First Trust Portfolios L.P., the Fund’s distributor, may pay the intermediary
for the sale of Fund shares and related services. These payments may create a
conflict of interest by influencing the broker-dealer or other intermediary and
your salesperson to recommend the Fund over another investment. Ask your
salesperson or visit your financial intermediary’s website for more
information.
8
Additional
Information on the Fund's Investment Objective and Strategies
The
Fund is a series of First Trust Exchange-Traded Fund and is regulated as an
“investment company” under the 1940 Act. The Fund operates as
an index fund and is not actively managed by First Trust. As such, the Fund’s
investment objective is to seek investment results that correspond generally to
the price and yield (before the Fund’s fees and expenses) of the Index. In
seeking to achieve this objective, the Fund will invest, under normal market
conditions, at least 80% of its net assets (plus any borrowings for investment
purposes) in the securities that comprise the Index. The Fund will generally
employ a full replication strategy, meaning that it will normally invest in all
of the securities comprising the Index in proportion to their weightings in the
Index.
The
Fund’s investment objective, its 80% investment strategy and each of the
policies described herein are non-fundamental policies that may be
changed by the Board of Trustees of the Trust (the “Board”) without shareholder
approval upon 60-days’ prior notice to shareholders. The fundamental policies of
the Fund are set forth in the Statement of Additional
Information
(“SAI”) under “Investment
Objective and Policies.” The Index Provider is not affiliated with the Fund,
First Trust or FTP.
While
it is not expected that the Fund will invest in the securities of other
investment companies, any such investments would be subject to
limitations imposed by the 1940 Act and the related rules and interpretations.
The Fund has adopted a policy that it will not invest in other investment
companies in excess of 1940 Act limits in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
The Fund is
classified as “non-diversified” under the 1940 Act. To the extent the Fund invests a
significant portion of its assets in a given jurisdiction or investment sector,
the Fund may be exposed to the risks associated with that jurisdiction or
investment sector.
The
Growth StrengthTM
Index
The Growth
StrengthTM Index seeks to provide exposure to a
mix of domestic equities with filters on (1) capitalization strength metrics;
and (2) revenue and cash flow growth. From the starting universe, the Index
ranks each company by its revenue growth and cash flow growth. The top 50
securities are chosen for inclusion in the Index, subject to a maximum of
fifteen securities from any one industry. The selected companies are
equally-weighted. The Index is reconstituted and rebalanced quarterly. The
Index’s quarterly rebalance and reconstitution schedule may cause the Fund to
experience a higher rate of portfolio turnover.
Nasdaq and The
Growth StrengthTM Index are trademarks (the
“Marks”) of Nasdaq, Inc. (collectively with
its affiliates “Nasdaq”). The Marks are licensed for use
with the Fund by the Fund’s investment advisor. The Fund has not been passed on
by Nasdaq as to its legality or suitability. The Fund is not issued, endorsed,
sold, or promoted by Nasdaq. The Fund should not be construed in anyway as
investment advice by Nasdaq. Nasdaq makes no warranties and bears no liability
with respect to the Fund.
Fund
Investments
Principal
Investments
Equity
Securities
The Fund invests in
equity securities, including common stocks. Common stock represents an equity
ownership interest in issuers. Holders of common stock are entitled to the
income and increase in the value of the assets and business of the issuers after
all debt obligations and obligations to preferred stockholders are
satisfied.
Real
Estate Investment Trusts
REITs
are financial vehicles that pool investors’ capital to purchase or finance real
estate. REITs are generally classified as equity REITs, mortgage REITs
or a combination of equity and mortgage REITs. Equity REITs invest the majority
of their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. REITs are not taxed on income distributed to shareholders
provided they comply with the applicable tax requirements.
9
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 the remainder of its assets in
securities with maturities of less than one year or in 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
temporary defensive strategy when the portfolio managers believe securities in
which the Fund normally invests have elevated risks due to political or economic
factors and in other extraordinary circumstances. For more information on
eligible short-term investments, see the SAI.
Illiquid
Investments
The
Fund may invest up to 15% of its net assets in investments and other instruments
that are, at the time of investment, illiquid (determined
using the Securities and Exchange Commission's standard applicable to investment
companies, i.e., any investment that
the Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment). For this purpose,
illiquid investments may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities
Act"),
that are deemed to be illiquid, and certain repurchase agreements.
Disclosure
of Portfolio Holdings
The
Fund’s portfolio holdings are available on the Fund's website at
www.ftportfolios.com. A description of the policies and procedures with
respect to the disclosure of the Fund's portfolio securities is included in the
Fund's SAI, which is also available on the Fund's website.
Risks
of Investing in the Fund
Risk
is inherent in all investing. Investing in the Fund involves risk, including the
risk that you may lose all or part of your investment. There can
be no assurance that the Fund will meet its stated objective. Before you invest,
you should consider the following supplemental disclosure pertaining to the
Principal Risks set forth above as well as additional Non-Principal Risks set
forth below in this prospectus. The order of the below risk factors does not
indicate the significance of any particular risk factor.
Principal
Risks
AUTHORIZED
PARTICIPANT CONCENTRATION RISK. Only an authorized
participant may engage in creation or redemption transactions directly with the
Fund. A limited number of institutions act as authorized participants for the
Fund. However, participants are not obligated to make a market in the Fund’s
shares or submit purchase and redemption orders for creation units. To the
extent that these institutions exit the business, reduce their role or are
unable to proceed with creation and/or redemption orders and no other authorized
participant steps forward to create or redeem, the Fund’s shares may trade at a
premium or discount to the Fund’s net asset value and possibly face delisting
and the bid/ask spread on the Fund’s shares may widen.
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
10
operations,
potentially resulting in: financial losses; interference with the Fund’s ability
to calculate its net asset value; disclosure of confidential
trading information; impediments to trading; submission of erroneous trades or
erroneous creation or redemption orders; the inability of the Fund or its
service providers to transact business; violations of applicable privacy and
other laws; regulatory fines penalties, reputational damage, reimbursement or
other compensation costs; or additional compliance costs. Substantial costs may
be incurred by the Fund in order to resolve or prevent cyber incidents in the
future. While the Fund has established business continuity plans in the event
of, and risk management systems to prevent, such cyber attacks, there are
inherent limitations in such plans and systems, including the possibility that
certain risks have not been identified and that prevention and remediation
efforts will not be successful. Furthermore, the Fund cannot control the cyber
security plans and systems put in place by service providers to the Fund,
issuers in which the Fund invests, market makers or authorized participants.
However, there is no guarantee that such efforts will succeed, and the Fund and
its shareholders could be negatively impacted as a result.
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.
GROWTH
STOCKS INVESTMENT RISK. The Fund utilizes a
growth style of investing. Growth stocks generally are priced higher than
non-growth stocks in relation to an issuer’s earnings and other measures because
investors believe they have greater growth potential. However, there is no
guarantee that such an issuer will realize that growth potential. In addition,
the market values of growth stocks may be more volatile than other types of
investments, and therefore more susceptible to rapid price swings, especially
during periods of economic uncertainty or in response to adverse news about the
condition of the issuer, such as earnings disappointments. The returns on growth
stocks may or may not move in tandem with the returns on other styles of
investing or the overall stock market. Growth stocks may fall out of favor and
trail the returns of funds employing other styles of investing. Growth stocks
may also be more adversely affected in a down market, as growth stocks typically
have little or no dividend income to absorb the effect of adverse market
conditions.
HEALTH
CARE COMPANIES RISK. The Fund invests
significantly in health care companies. Health care companies, such as companies
providing medical and health care goods and services, companies engaged in
manufacturing medical equipment, supplies and pharmaceuticals, as well as
operating healthcare facilities and the provision of managed healthcare, may be
affected by government regulations and government health care programs,
increases or decreases in the cost of medical products and services and product
liability claims, among other factors. Many health care companies are heavily
dependent on patent protection, and the expiration of a company’s patent may
adversely affect that company’s profitability. Research and development costs of
bringing new drugs to market are substantial, and there is no guarantee that a
proposed product will ever come to market. Health care companies are also
subject to competitive forces that may result in price discounting, may be
thinly capitalized and susceptible to product obsolescence.
INDEX
CONCENTRATION RISK. The Fund will be
concentrated in an industry or a group of industries to the extent that the
Index is so concentrated. To the extent that the Fund invests a significant
percentage of its assets in a single asset class or the securities of issuers
within the same country, state, region, industry or sector, an adverse economic,
business or political development may affect the value of the Fund’s investments
more than if the Fund were more broadly diversified. A significant exposure
makes the Fund more susceptible to any single occurrence and may subject the
Fund to greater market risk than a fund that is more broadly diversified. There
may be instances in which the Index, for a variety of reasons including changes
in the prices of individual securities held by the Fund, has a larger exposure
to a small number of stocks or a single stock relative to the rest of the stocks
in the Index. Under such circumstances, the Fund will not deviate from the Index
except in rare circumstances or in an immaterial way and therefore the Fund’s
returns would be more greatly influenced by the returns of the stock(s) with the
larger exposure.
INDEX
OR MODEL CONSTITUENT RISK. The Fund may be a
constituent of one or more indices or ETF models. As a result, the Fund may be
included in one or more index-tracking ETFs or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving
the Fund's shares, the size of the Fund and the market volatility of the Fund’s
shares. Inclusion in an index could increase demand for the Fund and removal
from an index could result in outsized selling
11
activity
in a relatively short period of time. As a result, the Fund’s net asset value
could be negatively impacted and the Fund’s market price may be
below the Fund’s net asset value during certain periods. In addition, index
rebalances may potentially result in increased trading activity. To the extent
buying or selling activity increases, the Fund can be exposed to increased
brokerage costs and adverse tax consequences and the market price of the Fund
can be negatively affected.
INDEX
PROVIDER RISK. There is no
assurance that the Index Provider, or any agents that act on its behalf, will
compile the Index accurately, or that the Index will be determined, maintained,
constructed, reconstituted, rebalanced, composed, calculated or disseminated
accurately. The Index Provider and its agents do not provide any representation
or warranty in relation to the quality, accuracy or completeness of data in the
Index, and do not guarantee that the Index will be calculated in accordance with
its stated methodology. The Advisor’s mandate as described in this prospectus is
to manage the Fund consistently with the Index provided by the Index Provider.
The Advisor relies upon the Index provider and its agents to accurately compile,
maintain, construct, reconstitute, rebalance, compose, calculate and disseminate
the Index accurately. Therefore, losses or costs associated with any Index
Provider or agent errors generally will be borne by the Fund and its
shareholders. To correct any such error, the Index Provider or its agents may
carry out an unscheduled rebalance of the Index or other modification of Index
constituents or weightings. When the Fund in turn rebalances its portfolio, any
transaction costs and market exposure arising from such portfolio rebalancing
will be borne by the Fund and its shareholders. Unscheduled rebalances also
expose the Fund to additional tracking error risk. Errors in respect of the
quality, accuracy and completeness of the data used to compile the Index may
occur from time to time and may not be identified and corrected by the Index
Provider for a period of time or at all, particularly where the Index is less
commonly used as a benchmark by funds or advisors. For example, during a period
where the Index contains incorrect constituents, the Fund tracking the Index
would have market exposure to such constituents and would be underexposed to the
Index’s other constituents. Such errors may negatively impact the Fund and its
shareholders. The Index Provider and its agents rely on various sources of
information to assess the criteria of issuers included in the Index, including
information that may be based on assumptions and estimates. Neither the Fund nor
the Advisor can offer assurances that the Index’s calculation methodology or
sources of information will provide an accurate assessment of included issuers.
Unusual market conditions may cause the Index Provider to postpone a scheduled
rebalance, which could cause the Index to vary from its normal or expected
composition. The postponement of a scheduled rebalance in a time of market
volatility could mean that constituents that would otherwise be removed at
rebalance due to changes in market capitalizations, issuer credit ratings, or
other reasons may remain, causing the performance and constituents of the Index
to vary from those expected under normal conditions. Apart from scheduled
rebalances, the Index Provider or its agents may carry out additional ad hoc
rebalances to the Index due to unusual market conditions or in order, for
example, to correct an error in the selection of index
constituents.
INFORMATION
TECHNOLOGY COMPANIES RISK. Information
technology companies produce and provide hardware, software and information
technology systems and services. Information technology companies are generally
subject to the following risks: rapidly changing technologies and existing
product obsolescence; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions and new market entrants. Information technology
companies may be smaller and less experienced companies, with limited product
lines, markets or financial resources and fewer experienced management or
marketing personnel. Information technology company stocks, particularly those
involved with the internet, have experienced extreme price and volume
fluctuations that are often unrelated to their operating performance. In
addition, information technology companies are particularly vulnerable to
federal, state and local government regulation, and competition and
consolidation, both domestically and internationally, including competition from
foreign competitors with lower production costs. Information technology
companies also face competition for services of qualified personnel and heavily
rely on patents and intellectual property rights and the ability to enforce such
rights to maintain a competitive advantage.
MARKET
MAKER RISK. The Fund faces
numerous market trading risks, including the potential lack of an active market
for Fund shares due to a limited number of market markers. Decisions by market
makers or authorized participants to reduce their role or step away from these
activities in times of market stress could inhibit the effectiveness of the
arbitrage process in maintaining the relationship between the underlying values
of the Fund’s portfolio securities and the Fund’s market price. The Fund may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in the
spread between the Fund’s net asset value and the price at which the Fund’s
shares are trading on the Exchange, which could result in a decrease in value of
the Fund’s shares. This reduced effectiveness could result in Fund shares
trading at a discount to net asset value and also in greater than normal
intraday bid-ask spreads for Fund shares.
12
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, natural
disasters, 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 ensuing policies enacted by governments and central banks have
caused and may continue to cause significant volatility and uncertainty in
global financial markets, negatively impacting global growth prospects. While
vaccines have been developed, there is no guarantee
that vaccines will be effective against future variants of the disease.
Additionally, in February 2022, Russia invaded Ukraine which has caused and
could continue to cause significant market disruptions and volatility within the
markets in Russia, Europe, and the United States. The hostilities and sanctions
resulting from those hostilities could have a significant impact on certain Fund
investments as well as Fund performance. These events also adversely affect the
prices and liquidity of the Fund’s portfolio securities or other instruments and
could result in disruptions in the trading markets. Recent and potential future
bank failures could result in disruption to the broader banking industry or
markets generally and reduce confidence in financial institutions and the
economy as a whole, which may also heighten market volatility and reduce
liquidity. Any of such circumstances could have a materially negative impact on
the value of the Fund’s shares and result in increased market volatility. During
any such events, the Fund’s shares may trade at increased premiums or discounts
to their net asset value and the bid/ask spread on the Fund’s shares may
widen.
NON-CORRELATION
RISK. The Fund’s return
may not match the return of its Index for a number of reasons. The Fund incurs
operating expenses not applicable to its Index and may incur costs in buying and
selling securities, especially when rebalancing the Fund’s portfolio holdings to
reflect changes in the composition of the Index. In addition, the Fund’s
portfolio holdings may not exactly replicate the securities included in its
Index or the ratios between the securities included in the Index. Accordingly,
the Fund's return may underperform the return of the Index.
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.
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.
PASSIVE
INVESTMENT RISK. The Fund is not
actively managed. The Fund invests in securities included in or representative
of its Index regardless of investment merit. The Fund generally will not attempt
to take defensive positions in declining markets. In the event that the Index is
no longer calculated, the Index license is terminated or the identity or
character of the Index is materially changed, the Fund will seek to engage a
replacement index.
PORTFOLIO
TURNOVER RISK. The Fund has an
investment strategy that may frequently involve buying and selling portfolio
securities. High portfolio turnover may result in the Fund paying higher levels
of transaction costs, including brokerage commissions, dealer mark-ups and other
costs and may generate greater tax liabilities for shareholders. Portfolio
turnover risk may cause the Fund’s performance to be less than
expected.
PREMIUM/DISCOUNT
RISK.
The market price of the Fund’s shares will generally fluctuate in accordance
with changes in the Fund’s net asset value as well as the relative supply of and
demand for shares on the Exchange. First Trust cannot predict whether shares
will trade below, at or above their net asset value because the shares trade on
the Exchange at market prices and not at net asset value. Price differences may
be due, in large part, to the fact that supply and demand forces at work in the
secondary trading market for shares will be closely related, but not identical,
to the same forces influencing the prices of the holdings of the Fund trading
individually or in the aggregate at any point in time. However, given that
shares can only be purchased and redeemed in Creation Units, and only to and
from broker-dealers and large institutional investors that have entered into
participation agreements (unlike shares of closed-end funds, which frequently
trade at appreciable discounts
13
from,
and sometimes at premiums to, their net asset value), First Trust believes that
large discounts or premiums to the net asset value of shares
should not be sustained absent disruptions to the creation and redemption
mechanism, extreme market volatility or potential lack of authorized
participants. During stressed market conditions, the market for the Fund’s
shares may become less liquid in response to deteriorating liquidity in the
market for the Fund’s underlying portfolio holdings, which could in turn lead to
differences between the market price of the Fund’s shares and their net asset
value and the bid/ask spread on the Fund’s shares may widen.
REIT
RISK. REITs typically own
and operate income-producing real estate, such as residential or commercial
buildings, or real-estate related assets, including mortgages. As a result,
investments in REITs are subject to the risks associated with investing in real
estate, which may include, but are not limited to: fluctuations in the value of
underlying properties; defaults by borrowers or tenants; market saturation;
changes in general and local operating expenses; and other economic, political
or regulatory occurrences affecting companies in the real estate sector.
Additionally, investing in REITs involves certain other risks related to their
structure and focus, which include, but are not limited to, dependency upon
management skills, limited diversification, the risks of locating and managing
financing for projects, heavy cash flow dependency, possible default by
borrowers, the costs and potential losses of self-liquidation of one or more
holdings, the risk of a possible lack of mortgage funds and associated interest
rate risks, overbuilding, property vacancies, increases in property taxes and
operating expenses, changes in zoning laws, losses due to environmental damages,
changes in neighborhood values and appeal to purchasers, the possibility of
failing to maintain exemptions from registration under the 1940 Act, failure to
satisfy the requirements of the Internal Revenue Code of 1986 for maintaining
REIT status and, in many cases, relatively small market capitalization, which
may result in less market liquidity and greater price volatility for a REIT’s
shares. REITs are also subject to the risk that the real estate market may
experience an economic downturn generally, which may have a material effect on
the real estate in which the REITs invest and their underlying portfolio
securities.
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.
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. The Fund’s use of cash for
creations and redemptions could also result in dilution to the Fund and
increased transaction costs, which could negatively impact the Fund’s ability to
achieve its investment objective.
14
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.
INTELLECTUAL
PROPERTY RISK. The Fund relies on a
license and related sublicense that permits the Fund to use its Index and
associated trade names, trademarks and service marks (the “Intellectual
Property”) in connection with
the Fund’s name and investment strategies. Such license and related sublicense
may be terminated by the Index Provider, and, as a result, the Fund may lose its
ability to use the Intellectual Property. There is also no guarantee that the
Index Provider has all rights to license the Intellectual Property for use by
the Fund. Accordingly, in the event the license is terminated or the Index
Provider does not have rights to license the Intellectual Property, it may have
a significant effect on the operation of the Fund.
ISSUER
SPECIFIC CHANGES RISK. The value of an
individual security or particular type of security can be more volatile than the
market as a whole and can perform differently from the value of the market as a
whole.
LEGISLATION/LITIGATION
RISK.
From time to time, various legislative initiatives are proposed in the United
States and abroad, which may have a negative impact on certain companies in
which the Fund invests. In addition, litigation regarding any of the issuers of
the securities owned by the Fund, or industries represented by these issuers,
may negatively impact the value of the securities. Such legislation or
litigation may cause the Fund to lose value or may result in higher portfolio
turnover if the 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, distributor, custodian
and fund administrative and accounting agent.
Management
of the Fund
First
Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois 60187, is the
investment advisor to the Fund. In this capacity, First Trust is
responsible for the selection and ongoing monitoring of the securities in the
Fund’s portfolio and certain other services necessary for the management of the
Fund.
First
Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace
Partners of DuPage L.P. is a limited partnership with one general partner, The
Charger Corporation, and a number of limited partners. The Charger Corporation
is an Illinois corporation controlled by James A. Bowen, the Chief Executive
Officer of First Trust. First Trust discharges its responsibilities subject to
the policies of the Fund.
First Trust serves
as advisor or sub-advisor for 9 mutual fund portfolios, 10 exchange-traded funds
consisting of 207 series
and 14 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 members of the
Investment Committee are jointly and primarily responsible for the management of
the Fund. Investments are made under the direction of the
Investment Committee. The Investment Committee consists of Daniel J. Lindquist,
David G. McGarel, Jon C. Erickson, Roger F. Testin, Stan
Ueland, Chris A. Peterson and Erik Russo.
•
Mr. Lindquist is
Chairman of the Investment Committee and presides over Investment Committee
meetings. Mr. Lindquist is responsible for overseeing the implementation of the
Fund’s investment strategy. Mr. Lindquist was a Senior Vice President of First
Trust and FTP from September 2005 to July 2012 and is now a Managing Director of
First Trust and FTP. Mr. Lindquist is a recipient of the Chartered Financial
Analyst designation.
•
Mr. McGarel is the
Chief Investment Officer, Chief Operating Officer and a Managing Director of
First Trust and FTP. As First Trust’s Chief Investment Officer, Mr. McGarel
consults with the other members of the Investment Committee on market conditions
and First Trust’s general investment philosophy. Mr. McGarel was a Senior Vice
President of First Trust and FTP from January 2004 to July 2012. Mr. McGarel is
a recipient of the Chartered Financial Analyst designation.
15
•
Mr. Erickson joined First Trust in
1994 and is a Senior Vice President of First Trust and FTP. As the head of First
Trust’s Equity Research Group, Mr. Erickson is responsible for determining the
securities to be purchased and sold by funds that do not utilize quantitative
investment strategies. Mr. Erickson is a recipient of the Chartered Financial
Analyst designation.
•
Mr. Testin is a
Senior Vice President of First Trust and FTP. Mr. Testin is the head of First
Trust’s Portfolio Management Group. Mr. Testin has been a Senior Vice President
of First Trust and FTP since November 2003. Mr. Testin is a recipient of the
Chartered Financial Analyst designation.
•
Mr. Ueland joined
First Trust as a Vice President in August 2005 and has been a Senior Vice
President of First Trust and FTP since September 2012. At First Trust, he plays
an important role in executing the investment strategies of each portfolio of
exchange-traded funds advised by First Trust.
•
Mr. Peterson is a
Senior Vice President and head of First Trust’s strategy research group. He
joined First Trust in January of 2000. Mr. Peterson is responsible for
developing and implementing quantitative equity investment strategies. Mr.
Peterson received his B.S. in Finance from Bradley University in 1997 and his
M.B.A. from the University of Chicago Booth School of Business in 2005. He has
over 20 years of financial services industry experience and is a recipient of
the Chartered Financial Analyst designation.
•
Mr. Russo is a Vice
President of First Trust. He is responsible for implementing the investment
strategies of each portfolio of exchange-traded funds advised by First Trust in
his role as a Portfolio Manager. Mr. Russo joined First Trust in January of
2010.
For
additional information concerning First Trust, including a description of the
services provided to the Fund, see the Fund's SAI. Additional
information about the compensation of Investment Committee members, other
accounts managed by members of the Investment Committee and ownership by members
of the Investment Committee of shares of 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
manages the investment of the Fund's assets. First Trust is paid an annual
unitary management fee by the Fund equal to 0.60% 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, brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and service fees payable pursuant to a Rule
12b-1 plan, if any, and extraordinary expenses.
As approved by the
Trust’s Board of Trustees, the management fee paid to First Trust will be
reduced at certain levels of Fund net assets (“breakpoints”). See the Fund's Statement of
Additional Information for more information on the breakpoints. A discussion
regarding the basis for the Board’s approval of the amendment to the Investment
Management Agreement incorporating the breakpoints is available in the Fund's
Annual Report to Shareholders for the fiscal period ended December 31,
2022.
A discussion
regarding the Board’s approval of the Investment Management Agreement is
available in the Fund's Annual Report to Shareholders for the period ended
December 31, 2022.
How
to Buy and Sell Shares
Most
investors buy and sell shares of the Fund in secondary market transactions
through brokers. Shares of the Fund are listed for trading on the
secondary market on one or more national securities exchanges. Shares can be
bought and sold throughout the trading day like other publicly traded shares.
There is no minimum investment when buying shares on the Exchange. Although
shares are generally purchased and sold in “round lots” of 100 shares, brokerage
firms typically permit investors to purchase or sell shares in smaller “odd
lots,” at no per-share price differential. When buying or selling shares through
a broker, investors should expect to pay brokerage commissions, investors may
receive less than the net asset value of the shares because shares are bought
and sold at market prices rather than at net asset value, and investors may pay
some or all of the bid-ask spread for each transaction (purchase or sale) of
Fund shares. Share prices are reported in dollars and cents per
share.
Under
normal circumstances, the Fund will pay out redemption proceeds to a redeeming
authorized participant within two days after the
authorized participant’s redemption request is received, in accordance with the
process set forth in the Fund’s SAI and in the agreement between the authorized
participant and the Fund’s distributor. However, the Fund reserves the right,
16
including
under stressed market conditions, to take up to seven days after the receipt of
a redemption request to pay an authorized
participant, all as permitted by the 1940 Act. If the Fund has foreign
investments in a country where a local market holiday, or series of consecutive
holidays, or the extended delivery cycles for transferring foreign investments
to redeeming authorized participants prevents the Fund from delivering such
foreign investments to an authorized participant in response to a redemption
request, the Fund may take up to 15 days after the receipt of the redemption
request to deliver such investments to the authorized participant.
For
purposes of the 1940 Act, the Fund is treated as a registered investment
company, and the acquisition of shares by other registered investment
companies and companies relying on Sections 3(c)(1) or 3(c)(7) of the 1940 Act
is subject to the restrictions of Section 12(d)(1) of the 1940 Act and the
related rules and interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is
the record owner of all outstanding shares of the Fund and is recognized as the
owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all
shares. Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book-entry or “street name” form.
Share
Trading Prices
The
trading price of shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and
can be affected by market forces of supply and demand, economic conditions and
other factors.
Frequent
Purchases and Redemptions of the Fund's Shares
The
Fund imposes no restrictions on the frequency of purchases and redemptions
(“market
timing”). In determining not
to approve a written, established policy, the Board evaluated the risks of
market timing activities by the Fund's shareholders. The Board considered that
the Fund's shares can only be purchased and redeemed directly from the Fund in
Creation Units by broker-dealers and large institutional investors that have
entered into participation agreements (i.e., authorized
participants (“APs”)) and that the vast
majority of trading in the Fund's shares occurs on the secondary market. Because
the secondary market trades do not involve the Fund directly, it is unlikely
those trades would cause many of the harmful effects of market timing, including
dilution, disruption of portfolio management, increases in the Fund's trading
costs and the realization of capital gains. With respect to trades directly with
the Fund, to the extent effected in-kind (i.e., for securities),
those trades do not cause any of the harmful effects that may result from
frequent cash trades. To the extent that the Fund may effect the purchase or
redemption of Creation Units in exchange wholly or partially for cash, the Board
noted that such trades could result in dilution to the Fund and increased
transaction costs, which could negatively impact the Fund's ability to achieve
its investment objective. However, the Board noted that direct trading by APs is
critical to ensuring that the shares trade at or close to net asset value. In
addition, the Fund imposes fixed and variable transaction fees on purchases and
redemptions of Creation Units to cover the custodial and other costs incurred by
the Fund in effecting trades. Finally, the Advisor monitors purchase and
redemption orders from APs for patterns of abusive trading and the Fund reserves
the right to not accept orders from APs that the Advisor has determined may be
disruptive to the management of the Fund.
Dividends,
Distributions and Taxes
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.
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.
17
Federal
Tax Matters
This
section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Fund. This section is current as of the
date of this prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state,
local or non-U.S. tax consequences.
This federal income
tax summary is based in part on the advice of counsel to the Fund. The Internal
Revenue Service ("IRS") could disagree with any conclusions
set forth in this section. The following disclosure may not be sufficient for
you to use for the purpose of avoiding penalties under federal tax
law.
As with any
investment, you should seek advice based on your individual circumstances from
your own tax advisor.
Fund
Status
The Fund intends to
continue to qualify as a
“regulated investment company” (a “RIC”) under the federal tax laws. If the
Fund qualifies as a RIC and distributes its income as required by the tax law,
the Fund generally will not pay federal income taxes.
Distributions
The
Fund's distributions are generally taxable. After the end of each year, you will
receive a tax statement that separates the distributions of the
Fund into 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. Some portion of the ordinary income distributions that are attributable
to dividends received by the Fund from shares in certain real estate investment
trusts may be designated by the Fund as eligible for a deduction for qualified
business income, provided certain holding period requirements are satisfied.
Generally, you will treat all capital gain dividends as long-term capital gains
regardless of how long you have owned your shares.
To
determine your actual tax liability for your capital gain dividends, you must
calculate your total net capital gain or loss for the tax year after
considering all of your other taxable transactions, as described below. In
addition, the Fund may make distributions that represent a return of capital for
tax purposes and thus will generally not be taxable to you; however, such
distributions may reduce your tax basis in your shares, which could result in
you having to pay higher taxes in the future when shares are sold or redeemed,
even if you sell or redeem the shares at a loss from your original investment. A
“return of capital” is a return, in whole or in part, of the funds that you
previously invested in the Fund. A return of capital distribution should not be
considered part of the Fund’s dividend yield or total return of an investment in
Fund shares. The tax status of your distributions from the Fund 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.
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 federal tax rate.
Capital gain received from assets held for more than one year that is considered
“unrecaptured section 1250 gain” (which may be the case, for example, with some
capital gains attributable to equity interests in real estate investment trusts
that constitute interests in entities treated as real estate investment trusts
for federal income tax purposes) is taxed at a maximum marginal stated federal
tax rate of 25%. In the case of capital gain dividends, the determination of
which portion of the capital gain dividend, if any, is subject to the 25% tax
rate, will be made based on rules prescribed by the United States Treasury.
Capital gains may also be subject to the Medicare tax described
above.
Net
capital gain equals net long-term capital gain minus net short-term capital loss
for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one
18
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 RIC such as the Fund are generally
taxed at the same rates that apply to net capital gain (as discussed above),
provided certain holding period requirements are satisfied and provided the
dividends are attributable to qualifying dividends received by the Fund itself.
Distributions with respect to shares in real estate investment trusts and
foreign corporations are qualifying dividends only in limited circumstances. The
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.
Dividends
Received Deduction
A corporation that
owns shares generally will not be entitled to the dividends received deduction
with respect to many dividends received from the Fund because the
dividends received deduction is generally not available for distributions from
RICs. However, certain ordinary income dividends on shares that are attributable
to qualifying dividends received by the Fund from certain corporations may be
reported by the Fund as being eligible for the dividends received
deduction.
Sale
of Shares
If you sell or
redeem your shares, you will generally recognize a taxable gain or loss. To
determine the amount of this gain or loss, you must subtract your tax
basis in your shares from the amount you receive in the transaction. Your tax
basis in your shares is generally equal to the cost of your shares, generally
including brokerage fees, if any. In some cases, however, you may have to adjust
your tax basis after you purchase your shares. An election may be available to
you to defer recognition of capital gain if you make certain qualifying
investments within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Taxes
on Purchase and Redemption of Creation Units
If you exchange
securities for Creation Units, you will generally recognize a gain or a loss.
The gain or loss will be equal to the difference between the market value
of the Creation Units at the time and your aggregate basis in the securities
surrendered and the cash component paid. If you exchange Creation Units for
securities, you will generally recognize a gain or loss equal to the difference
between your basis in the Creation Units and the aggregate market value of the
securities received and the cash redemption amount. The IRS, however, may assert
that a loss realized upon an exchange of securities for Creation Units or
Creation Units for securities cannot be deducted currently under the rules
governing “wash sales,” or on the basis that there has been no significant
change in economic position.
Treatment
of Fund Expenses
Expenses incurred and
deducted by the Fund will generally not be treated as income taxable to
you.
Non-U.S.
Tax Credit
Because
the Fund may invest in non-U.S. securities, the tax statement that you receive
may include an item showing non-U.S. taxes the Fund paid
to other countries. In this case, dividends taxed to you will include your share
of the taxes the Fund paid to other countries. You may be able to deduct or
receive a tax credit for your share of these taxes.
Non-U.S.
Investors
If
you are a non-U.S. investor (i.e., an investor other
than a U.S. citizen or resident or a U.S. corporation, partnership, estate or
trust), you should be aware that, generally, subject to applicable tax treaties,
distributions from the Fund will be characterized as dividends for federal
income tax purposes (other than dividends which the Fund properly reports as
capital gain dividends) and will be subject to U.S. federal income taxes,
including withholding taxes, subject to certain exceptions described below.
However, distributions received by a non-U.S. investor from the Fund that are
properly reported by the Fund as capital gain dividends may not be subject to
U.S. federal income taxes, including withholding taxes, provided that the Fund
makes certain
19
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. For tax years
after December 31, 2022, amounts paid to or recognized by a non-U.S. affiliate
that are excluded from tax under the portfolio interest, capital gain dividends,
short-term capital gains or tax-exempt interest dividend exceptions or
applicable treaties, may be taken into consideration in determining whether a
corporation is an “applicable corporation” subject to a 15% minimum tax on
adjusted financial statement income.
Distributions
may be subject to a U.S. withholding tax of 30% in the case of distributions to
(i) certain non-U.S. financial institutions that
have not entered into an agreement with the U.S. Treasury to collect and
disclose certain information and are not resident in a jurisdiction that has
entered into such an agreement with the U.S. Treasury and (ii) certain other
non-U.S. entities that do not provide certain certifications and information
about the entity’s U.S. owners. This withholding tax is also currently scheduled
to apply to the gross proceeds from the disposition of securities that produce
U.S. source interest or dividends. However, proposed regulations may eliminate
the requirement to withhold on payments of gross proceeds from
dispositions.
Investments
in Certain Non-U.S. Corporations
If
the Fund holds an equity interest in any “passive foreign investment companies”
(“PFICs”), which are
generally certain non-U.S. corporations that receive at least 75% of their
annual gross income from passive sources (such as interest, dividends, certain
rents and royalties or capital gains) or that hold at least 50% of their assets
in investments producing such passive income, the Fund could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its shareholders. The Fund will not be able to
pass through to its shareholders any credit or deduction for such taxes. The
Fund may be able to make an election that could ameliorate these adverse tax
consequences. In this case, the Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, the Fund might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax. Dividends paid by PFICs are not treated as qualified dividend
income.
Distribution
Plan
FTP
serves as the distributor of Creation Units for the Fund on an agency basis. FTP
does not maintain a secondary market in shares.
The
Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. In accordance with the Rule 12b-1 plan, the
Fund is authorized to pay an amount up to 0.25% of its average daily net assets
each year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional
services.
The
Fund does not currently pay 12b-1 fees, and pursuant to a contractual
arrangement, the Fund will not pay 12b-1 fees any time before
October 20, 2024. 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
("NYSE") is open for
trading. If the NYSE closes early on a valuation day, the Fund’s net asset value
will be determined as of that time. Net asset value per share 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
(including accrued expenses and dividends declared but unpaid), 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.
20
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 approved by the Board and in accordance
with the 1940 Act and the rules thereunder. Rule 2a-5 under the 1940 Act
requires the fair valuation of all portfolio investments for which market
quotations are not readily available. Pursuant to Rule 2a-5 under the 1940 Act,
the Board has appointed the Advisor as its valuation designee for all portfolio
investments. Portfolio securities listed on any exchange other than 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 AIM are valued at the official closing price on the business
day as of which such value is being determined.
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 primary exchange for such securities. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on Nasdaq or AIM, are
valued at the mean of the most recent bid and asked price, if available, and
otherwise at the last trade 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 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.
Certain securities
may not be able to be priced by pre-established pricing methods. Such securities
may be valued by the Advisor at fair value. The use of fair value
pricing by the Fund is governed by valuation procedures approved by the Board
and in accordance with the provisions of the 1940 Act and the rules thereunder.
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 of 1933, as amended (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, in the opinion of the Advisor, 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 portfolio
investment upon the measurement date under current market conditions. When fair
value prices are used, generally they will differ from the current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities. 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 buy or sell shares of the Fund,
the value of the Fund's securities may change on days when investors are not
able to buy 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. Any use of a different rate from the rates used
by the Index may adversely affect the Fund’s ability to track the
Index.
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. First Trust serves as the
fund reporting agent for the Fund.
Index
Provider
The
Index is compiled by the Index Provider. The Index Provider is not affiliated
with the Fund, First Trust or FTP. The Fund is entitled to use the
Index pursuant to a sublicensing arrangement with First Trust, which in turn has
a licensing agreement with the Index Provider. The Index Provider or its agent
also serves as calculation agent for the Index (the “Index
Calculation Agent”). The Index
Calculation Agent is responsible for the management of the day-to-day operations
of the Index, including calculating the value of the Index every 15 seconds,
widely disseminating the Index values every 15 seconds and tracking corporate
actions, some of which result in Index adjustments.
Disclaimers
First
Trust does not guarantee the accuracy and/or the completeness of the Index or
any data included therein, and First Trust shall have no
liability for any errors, omissions or interruptions therein. First Trust makes
no warranty, express or implied, as
21
to
results to be obtained by the Fund, owners of the shares of the Fund or any
other person or entity from the use of the Index or any data included
therein. First Trust makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the Index or any data included therein. Without limiting
any of the foregoing, in no event shall First Trust have any liability for any
special, punitive, direct, indirect or consequential damages (including lost
profits) arising out of matters relating to the use of the Index, even if
notified of the possibility of such damages.
The Fund is not
sponsored, endorsed, sold or promoted by Nasdaq, Inc. (“Nasdaq”) or its affiliates (Nasdaq with its
affiliates are referred to as the “Corporations”). The Corporations have not passed
on the legality or suitability of, or the accuracy or adequacy of descriptions
and disclosures relating to, the Fund. The Corporations make no representation
or warranty, express or implied, to the owners of the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly, or the ability of The Growth StrengthTM Index to track general stock market
performance. The Corporations’ only relationship to First Trust with respect to
the Fund is in the licensing of The Growth StrengthTM Index, and certain trade names of
the Corporations and the use of The Growth StrengthTM Index, which are determined,
composed and calculated by Nasdaq without regard to First Trust or the Fund.
Nasdaq has no obligation to take the needs of First Trust or the owners of the
Fund into consideration in determining, composing or calculating The Growth
StrengthTM Index. The Corporations are not
responsible for and have not participated in the determination of the timing of,
prices at, or quantities of Fund Shares to be issued or in the determination or
calculation of the equation by which Fund Shares are to be converted into cash.
The Corporations have no liability in connection with the administration,
marketing or trading of the Fund.
THE CORPORATIONS DO
NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE GROWTH
STRENGTHTM INDEX OR ANY DATA INCLUDED THEREIN.
THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT(S) OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE GROWTH STRENGTHTM INDEX OR ANY DATA INCLUDED THEREIN.
THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE GROWTH STRENGTHTM INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE
ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR
CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
Premium/Discount
Information
Information
showing the number of days the market price of the Fund's shares was greater (at
a premium) and less (at a discount) than the Fund's net
asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter),
is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
22
Total
Return Information
The table below
compares the total return of the Fund to the total return of the Index on which
it is based and a broad-based market index. The information
presented for the Fund is for the period indicated.
“Cumulative total
returns” represent the total change in value of an investment over the period
indicated. The net asset value per share of the Fund is the value of
one share of the Fund and is computed by dividing the value of all assets of the
Fund (including accrued interest and dividends), less liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
outstanding shares. The net asset value return is based on the net asset value
per share of the Fund 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. Since the shares of
the Fund typically do not trade in the secondary market until several days 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 index. 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 Growth Strength ETF (FTGS)
Total Returns as of December 31, 2022
Total Returns as of December 31, 2022
|
|
Cumulative |
|
|
Inception
(10/25/2022) |
|
Fund
Performance |
|
|
Net Asset
Value |
1.20% |
|
Market
Price |
1.39% |
|
Index
Performance |
|
|
The Growth
StrengthTM Index
|
1.13% |
|
S&P
500®
Index |
-0.15% |
23
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the period shown. Certain information reflects financial
results for a single share of the Fund. The total return represents the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). The information for
the period indicated has been derived from financial statements audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report to Shareholders dated
December 31, 2022 and is incorporated by reference in the Fund's SAI, which is
available upon request.
First Trust
Exchange-Traded Fund
Financial
Highlights
For a share outstanding throughout the period
For a share outstanding throughout the period
First Trust Growth
Strength ETF (FTGS)
|
|
|
|
|
Period
EndedDecember 31, 2022 (a) |
|
Net
asset value, beginning of period |
$20.29 |
|
Income
from investment operations: |
|
|
Net
investment income (loss) |
0.04 |
|
Net
realized and unrealized gain (loss) |
0.20 |
|
Total
from investment operations |
0.24 |
|
Distributions
paid to shareholders from: |
|
|
Net
investment income |
(0.04) |
|
Net
asset value, end of period |
$20.49 |
|
Total
Return(b) |
1.20% |
|
Ratios/supplemental
data: |
|
|
Net
assets, end of period (in 000’s) |
$1,024 |
|
Ratios
to average net assets: |
|
|
Ratio of
total expenses to average net assets |
0.60%
(c) |
|
Ratio of
net expenses to average net assets |
0.60%
(c) |
|
Ratio of
net investment income (loss) to average net assets |
1.11%
(c) |
|
Portfolio
turnover rate(d) |
25% |
(a)
Inception date
for FTGS is
October
25,
2022,
which is
consistent with the Fund’s commencement of investment operations and the date of
the initial
creation units
were established.
(b)
Total return is
calculated assuming an initial investment made at the net asset value at the
beginning of the period, reinvestment of all distributions at net asset value
during the period, and redemption at net asset value on the last day of the
period. The return presented does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not
annualized for periods of less than a year.
(c)
Annualized.
(d)
Portfolio
turnover is calculated for the time period presented and is not annualized for
periods of less than a year and does not include securities received or
delivered from processing creations or redemptions and in-kind
transactions.
24
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.
25
|
First
Trust
Exchange-Traded
Fund |
First
Trust Growth Strength ETF
For
More Information
For
more detailed information on the Fund, several additional sources of information
are available to you. The SAI, incorporated by
reference into this prospectus, contains detailed information on the Fund's
policies and operation. Additional information about the Fund's investments is
available in the annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund's performance during
the last fiscal year. The Fund's most recent SAI, annual and semi-annual reports
and certain other information are available free of charge by calling the Fund
at (800) 621-1675, on the Fund's website at www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You
may obtain this and other information regarding the Fund, including the SAI and
the Codes of Ethics adopted by First Trust, FTP
and the Trust, directly from the Securities and Exchange Commission (the
"SEC"). Information on
the SEC’s website is free of charge. Visit the SEC’s online EDGAR database at
www.sec.gov. You may also request information regarding the Fund by sending a
request (along with a duplication fee) to the SEC by sending an electronic
request to publicinfo@sec.gov.
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC
File #: 333-125751
811-21774
811-21774