|
First
Trust
Exchange-Traded
Fund III |
Prospectus
First Trust
Long/Short Equity ETF
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Ticker
Symbol: |
FTLS |
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Exchange: |
NYSE
Arca |
First
Trust Long/Short Equity ETF (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 III (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, 2023
Summary
Information
(fees paid directly from your investment)
|
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(1) |
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Total Annual
Fund Operating Expenses |
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(1)
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
$ |
3
4
5
6
7
Calendar Year Total Returns as of 12/31
8
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|
|
|
|
|
|
|
|
1
Year |
5
Years |
Since
Inception |
Inception
Date |
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Return Before
Taxes |
- |
|
|
|
|
Return After
Taxes On Distributions |
- |
|
|
|
|
Return After
Taxes on Distributions and Sale of Fund Shares |
- |
|
|
|
|
S&P
500® Index
(reflects no deduction for fees, expenses or
taxes) |
- |
|
|
|
Management
Investment
Advisor
First
Trust Advisors L.P. (“First
Trust”
or the “Advisor”)
Portfolio
Managers
The
following persons serve as portfolio managers of the Fund.
•
John Gambla, CFA, Senior Portfolio
Manager of First Trust
•
Rob A. Guttschow,
CFA, Senior Portfolio Manager of First Trust
The
portfolio managers are primarily and jointly responsible for the day to day
management of the Fund. Each portfolio manager has served in
such capacity for the Fund since 2014.
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.
9
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.
10
Additional
Information on the Fund's Investment Objective and Strategies
The
Fund is a series of First Trust Exchange-Traded Fund III and is regulated as an
“investment company” under the Investment Company Act of 1940,
as amended (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. The Name Policy may be
changed by the Board of Trustees without shareholder approval upon 60 days prior
written notice.
Fund
Investments
Principal
Investments
Equity
Securities
The
Fund invests in equity securities, which may include common stocks, preferred
securities, warrants to purchase common stocks or preferred
securities, securities convertible into common stocks or preferred securities,
and other securities with equity characteristics, such as real estate investment
trusts, master limited partnerships and depositary receipts. The Fund takes long
and short positions in equity securities. Generally, long positions seek to
profit from increases in the price of a security, while short selling is a
technique that seeks to profit from the falling price of a security. Short
selling involves selling a security that has been borrowed from a third party
with the intention of buying an identical security back at a later date to
return to that third party.
Exchange-Traded
Funds
ETFs
are registered investment companies that trade on a securities exchange and
their shares may, at times, trade at a premium or discount to their
net asset value. In addition, the Fund will incur brokerage costs when
purchasing and selling shares of ETFs. As a shareholder in an ETF, the Fund will
bear its ratable share of the ETF’s expenses and will remain subject to payment
of the ETF’s advisory and administrative fees with respect to assets so
invested. Shareholders would therefore be subject to duplicative expenses. In
addition, the Fund will incur brokerage costs when purchasing and selling shares
of ETFs. Securities of ETFs may be leveraged, in which case the value and/or
yield of such securities will tend to be more volatile than securities of
unleveraged vehicles.
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) or 12(d)(1)(G) of the 1940
Act.
Derivative
Instruments
The Fund may invest
up to 20% of the Fund’s net assets in derivative instruments, including U.S.
exchange-listed equity index futures contracts. The Fund
may
make margin payments
when it takes positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase
options). If the applicable guidelines prescribed under the 1940 Act so require,
the Fund 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 in a segregated custodial account in the amount
prescribed. The Fund will only enter into transactions in derivative instruments
with counterparties that the Advisor reasonably believes are capable of
performing under the applicable contract. The Fund’s investments in derivative
instruments will be consistent with the Fund’s investment objectives and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple
of an index.
To the extent the
Fund enters into derivatives transactions, it will do so pursuant to Rule 18f-4
under the 1940 Act. Rule 18f-4 requires the Fund to implement
certain policies and procedures designed to manage its derivatives risks,
dependent upon the Fund’s level of exposure to derivative
instruments.
11
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 cash equivalents, or it may
hold cash. The percentage of the Fund invested in such holdings varies and
depends on several factors, including market conditions. For temporary defensive
purposes and during periods of high cash inflows or outflows, the Fund may
depart from its principal investment strategies and invest part or all of its
assets in these securities, or it may hold cash. During such periods, the Fund
may not be able to achieve its investment objective. The Fund may adopt a
defensive strategy when the portfolio managers believe securities in which the
Fund normally invests have elevated risks due to political or economic factors
and in other extraordinary circumstances. For more information on eligible
short-term investments, see the SAI.
Illiquid
Investments
The
Fund may invest up to 15% of its net assets in securities and other instruments
that are, at the time of investment, illiquid (determined using the
Securities and Exchange Commission's standard applicable to investment
companies, i.e., any investment that
the Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment). For this purpose,
illiquid investments may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal 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, among
others.
Disclosure
of Portfolio Holdings
The
Fund’s portfolio holdings are available on the Fund's website at
www.ftportfolios.com. A description of the policies and procedures with
respect to the disclosure of the Fund's portfolio securities is included in the
Fund's SAI, which is also available on the Fund's website.
Risks
of Investing in the Fund
Risk
is inherent in all investing. Investing in the Fund involves risk, including the
risk that you may lose all or part of your investment. There can
be no assurance that the Fund will meet its stated objective. Before you invest,
you should consider the following disclosure pertaining to the Principal Risks
set forth above as well as additional Non-Principal Risks set forth below in
this prospectus. The order of the below risk factors does not indicate the
significance of any particular risk factor.
Principal
Risks
AUTHORIZED
PARTICIPANT CONCENTRATION RISK. Only an authorized participant may
engage in creation or redemption transactions directly with the Fund. A limited
number of institutions act as authorized participants for the Fund. However,
participants are not obligated to make a market in the Fund’s shares or submit
purchase and redemption orders for creation units. To the extent that these
institutions exit the business, reduce their role or are unable to proceed with
creation and/or redemption orders and no other authorized participant steps
forward to create or redeem, the Fund’s shares may trade at a premium or
discount to the Fund’s net asset value and possibly face delisting and the
bid/ask spread on the Fund’s shares may widen.
COUNTERPARTY
RISK. If
the Fund enters into an investment or transaction that depends on the
performance of another party, the Fund becomes subject to the credit risk of
that counterparty. The Fund's ability to profit from these types of investments
and transactions depends on the willingness and ability of the Fund’s
counterparty to perform its obligations. If a counterparty fails to meet its
contractual obligations, the Fund may be unable to terminate or realize any gain
on the investment or transaction, resulting in a loss to the Fund. The Fund may
experience significant delays in obtaining any recovery in an insolvency,
bankruptcy, or other reorganization proceeding involving a counterparty
(including recovery of any collateral posted by it) and may obtain only a
limited recovery or may obtain no recovery in such circumstances. If the Fund
holds collateral posted by its counterparty, it may be delayed or prevented from
realizing on the collateral in the event of a bankruptcy or insolvency
proceeding relating to the counterparty. Under applicable law or contractual
provisions, including if the Fund enters into an investment or transaction with
a financial institution and such financial institution (or an affiliate of the
financial institution) experiences financial difficulties, then the Fund may in
certain situations be prevented or delayed from exercising its rights to
terminate the investment or transaction, or to realize on any collateral and may
result in the suspension of payment and delivery obligations of the parties
under such investment or transactions or in another institution being
substituted for
12
that
financial institution without the consent of the Fund. Further, the Fund may be
subject to “bail-in” risk under applicable law whereby, if
required by the financial institution's authority, the financial institution's
liabilities could be written down, eliminated or converted into equity or an
alternative instrument of ownership. A bail-in of a financial institution may
result in a reduction in value of some or all of securities and, if the Fund
holds such securities or has entered into a transaction with such a financial
security when a bail-in occurs, the Fund may also be similarly
impacted.
CYBER
SECURITY RISK. The Fund is
susceptible to operational risks through breaches in cyber security. A breach in
cyber security refers to both intentional and unintentional events that may
cause the Fund to lose proprietary information, suffer data corruption or lose
operational capacity. Such events could cause the Fund to incur regulatory
penalties, reputational damage, additional compliance costs associated with
corrective measures and/or financial loss. These risks typically are not covered
by insurance. In general, cyber incidents can result from deliberate attacks or
unintentional events. Cyber incidents include, but are not limited to, gaining
unauthorized access to digital systems (e.g., through “hacking”
or malicious software coding) for purposes of misappropriating assets or
sensitive information, corrupting data or causing operational disruption. Cyber
attacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make
network services unavailable to intended users). Cyber security failures by or
breaches of the systems of the Advisor, distributor and other service providers
(including, but not limited to, sub-advisors, index providers, fund accountants,
custodians, transfer agents and administrators), market makers, authorized
participants or the issuers of securities in which the Fund invests, have the
ability to cause disruptions and impact business operations, potentially
resulting in: financial losses; interference with the Fund’s ability to
calculate its net asset value; disclosure of confidential trading information;
impediments to trading; submission of erroneous trades or erroneous creation or
redemption orders; the inability of the Fund or its service providers to
transact business; violations of applicable privacy and other laws; regulatory
fines penalties, reputational damage, reimbursement or other compensation costs;
or additional compliance costs. Substantial costs may be incurred by the Fund in
order to resolve or prevent cyber incidents in the future. While the Fund has
established business continuity plans in the event of, and risk management
systems to prevent, such cyber attacks, there are inherent limitations in such
plans and systems, including the possibility that certain risks have not been
identified and that prevention and remediation efforts will not be successful.
Furthermore, the Fund cannot control the cyber security plans and systems put in
place by service providers to the Fund, issuers in which the Fund invests,
market makers or authorized participants. However, there is no guarantee that
such efforts will succeed, and the Fund and its shareholders could be negatively
impacted as a result.
DEPOSITARY
RECEIPTS RISK. The Fund
invests in depositary receipts. Depositary 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.
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.
13
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.
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.
ETF
RISK.
The Fund may invest in ETFs. Most ETFs use a “passive” investment strategy and
seek to replicate the performance of a market index. Such ETFs do not take
defensive positions in volatile or declining markets their shares may trade
below net asset value. While some ETFs seek to achieve the same return as a
particular market index, the performance of the ETF may diverge from the
performance of the index. Some ETFs are actively managed ETFs and do not track a
particular index which indirectly subjects an investor to active management
risk. An active secondary market in ETF shares may not develop or be maintained
and may be halted or interrupted due to actions by its listing exchange, unusual
market conditions or other reasons. There can be no assurance that an ETF’s
shares will continue to be listed on an active exchange. In addition,
shareholders bear both their proportionate share of the Fund’s expenses and,
indirectly, the ETF’s expenses, incurred through the Fund’s ownership of the
ETF. Because the expenses and costs of an ETF are shared by its investors,
redemptions by other investors in the ETF could result in decreased economies of
scale and increased operating expenses for such ETF. These transactions might
also result in higher brokerage, tax or other costs for the ETF. This risk may
be particularly important when one investor owns a substantial portion of the
ETF. There is a risk that ETFs in which the Fund invests may terminate due to
extraordinary events. For example, any of the service providers to ETFs, such as
the trustee or sponsor, may close or otherwise fail to perform their obligations
to the ETF, and the ETF may not be able to find a substitute service provider.
Also, certain ETFs may be dependent upon licenses to use various indexes as a
basis for determining their compositions and/or otherwise to use certain trade
names. If these licenses are terminated, the ETFs may also terminate. In
addition, an ETF may terminate if its net assets fall below a certain
amount.
FUTURES
CONTRACTS RISK. The Fund
may enter into 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 the 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 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 the 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 the 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, the 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'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
14
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.
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.
LEVERAGE
RISK.
The Fund has exposure to instruments subjecting them to leverage risk. Leverage
may result in losses that exceed the amount originally invested and may
accelerate the rates of losses. Leverage tends to magnify, sometimes
significantly, the effect of any increase or decrease in the Fund’s exposure to
an asset or class of assets and may cause the value of the Fund’s portfolio and
the Fund’s shares to be volatile and sensitive to market swings. Certain
instruments have the potential for unlimited loss, regardless of the size of the
initial investment.
LIQUIDITY
RISK. The Fund may have
investments that it may not be able to dispose of or close out readily at a
favorable time or price (or at all), or at a price approximating the Fund’s
valuation of the investment. For example, certain investments may be subject to
restrictions on resale, may trade over-the-counter or in limited volume, or may
not have an active trading market. Illiquid securities may trade at a discount
from comparable, more liquid investments and may be subject to wide fluctuations
in market value and the bid/ask spread of the Fund's shares may widen. It may be
difficult for the Fund to value illiquid securities accurately. The market for
certain investments may become illiquid under adverse market or economic
conditions independent of any specific adverse changes in the conditions of a
particular issuer. If the Fund needed to sell a large block of illiquid
securities to meet shareholder redemption request or to raise cash, these sales
could further reduce the securities’ prices and adversely affect performance of
the Fund. Disposal of illiquid securities may entail registration expenses and
other transaction costs that are higher than those for liquid
securities.
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 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 ensuing policies enacted by governments and central banks
15
have caused and may continue to cause
significant volatility and uncertainty in global financial markets, negatively
impacting global growth prospects. While the
U.S. has resumed “reasonably” normal
business activity, many countries continue to impose lockdown measures.
Additionally, there is no guarantee that vaccines will be effective against
emerging variants of the disease. Additionally, in February 2022, Russia invaded Ukraine
which has caused and could continue to
cause significant market disruptions and volatility within the markets in
Russia, Europe, and the United States. The hostilities and sanctions resulting from those
hostilities could have a significant impact on certain Fund investments as well
as Fund performance. These events also adversely affect the prices and liquidity
of the Fund’s portfolio securities or other instruments and could result in
disruptions in the trading markets. Any of such circumstances could have a
materially negative impact on the value of the Fund’s shares and result in
increased market volatility. During any such events, the Fund’s shares may trade
at increased premiums or discounts to their net asset value and the bid/ask
spread on the Fund’s shares may widen.
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.
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.
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
16
the secondary
trading market for shares will be closely related, but not identical, to the
same forces influencing the prices of the holdings of the Fund trading
individually or in the aggregate at any point in time. However, given that
shares can only be purchased and redeemed in Creation Units, and only to and
from broker-dealers and large institutional investors that have entered into
participation agreements (unlike shares of closed-end funds, which frequently
trade at appreciable discounts from, and sometimes at premiums to, their net
asset value), First Trust believes that large discounts or premiums to the net
asset value of shares should not be sustained absent disruptions to the creation
and redemption mechanism, extreme market volatility or potential lack of
authorized participants. During stressed market conditions, the market for the
Fund’s shares may become less liquid in response to deteriorating liquidity in
the market for the Fund’s underlying portfolio holdings, which could in turn
lead to differences between the market price of the Fund’s shares and their net
asset value and the bid/ask spread on the Fund’s shares may widen.
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.
SHORT
SALES RISK. The Fund may
engage in short sales. In connection with a short sale of a security or other
instrument, the Fund is subject to the risk that instead of declining, the price
of the security or other instrument sold short will rise. If the price of the
security or derivative that is the subject of a short sale increases, then the
Fund will incur a loss equal to the increase in price from the time that the
short sale was entered into plus any premiums and interest paid to a third party
in connection with the short sale. The risk of loss on a shorted position arises
from the increase in value of the security sold short and is potentially
unlimited unlike the risk of loss on a long position, which is limited to the
amount paid for the investment plus transaction costs. Therefore, short sales
involve the risk that losses may be exaggerated, potentially losing more money
than the actual cost of the investment. Also, there is the risk that the third
party to the short sale may fail to honor its contract terms, causing a loss to
the Fund. Further, in times of unusual or adverse economic, market or political
conditions, the Fund may not be able to fully or partially implement its short
selling strategy.
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 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.
17
TRADING
ISSUES RISK. Trading in Fund
shares on the Exchange may be halted due to market conditions or for reasons
that, in the view of the Exchange, make trading in shares inadvisable. In
addition, trading in Fund shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to the Exchange’s “circuit
breaker” rules. There can be no assurance that the requirements of the Exchange
necessary to maintain the listing of the Fund will continue to be met or will
remain unchanged. The Fund may have difficulty maintaining its listing on the
Exchange in the event the Fund’s assets are small, the Fund does not have enough
shareholders, or if the Fund is unable to proceed with creation and/or
redemption orders.
VALUATION
RISK. The Fund may hold
securities or other assets that may be valued on the basis of factors other than
market quotations. This may occur because the asset or security does not trade
on a centralized exchange, or in times of market turmoil or reduced liquidity.
There are multiple methods that can be used to value a portfolio holding when
market quotations are not readily available. The value established for any
portfolio holding at a point in time might differ from what would be produced
using a different methodology or if it had been priced using market quotations.
Portfolio holdings that are valued using techniques other than market
quotations, including “fair valued” assets or securities, may be subject to
greater fluctuation in their valuations from one day to the next than if market
quotations were used. In addition, there is no assurance that the Fund could
sell or close out a portfolio position for the value established for it at any
time, and it is possible that the Fund would incur a loss because a portfolio
position is sold or closed out at a discount to the valuation established by the
Fund at that time. The Fund’s ability to value investments may be impacted by
technological issues or errors by pricing services or other third-party service
providers.
VOLATILITY
RISK. Volatility is the characteristic of a
security, an index or a market to fluctuate significantly in price within a
short time period. The Fund may invest in securities or financial instruments
that exhibit more volatility than the market as a whole. Such exposures
could cause the Fund’s net asset value to experience significant
increases or declines in value over
short periods of time. Volatility can be
caused by many factors, including changes in the economy or financial markets or
for reasons specific to a particular issuer.
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.
DEPENDENCE
ON KEY PERSONNEL RISK. The Fund 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
Advisor were to lose the services of either 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 either of the portfolio
managers in the event of their death, resignation, retirement or inability to
act on behalf of the Advisor.
FAILURE
TO QUALIFY AS A REGULATED INVESTMENT COMPANY RISK. If, in any year, the
Fund fails to qualify as a regulated investment company under the applicable tax
laws, the Fund would be taxed as an ordinary corporation. In such circumstances,
18
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.
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.
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
objectives and policies. The Trust is organized as a Massachusetts business
trust. The Board is responsible for the overall management and direction of the
Trust. The Board elects the Trust’s officers and approves all significant
agreements, including those with the Advisor, distributor, custodian and fund
administrative and accounting agent.
Management
of the Fund
First
Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois 60187, is the
investment advisor to the Fund. In this capacity, First Trust is
responsible for the selection and ongoing monitoring of the securities in the
Fund’s portfolio and certain other services necessary for the management of the
portfolios.
First Trust is a
limited partnership with one limited partner, Grace Partners of DuPage L.P., and
one general partner, The Charger Corporation. Grace Partners of DuPage
L.P. is a limited partnership with one general partner, The Charger Corporation,
and a number of limited partners. The Charger Corporation is an Illinois
corporation controlled by James A. Bowen, the Chief Executive Officer of First
Trust. First Trust discharges its responsibilities subject to the policies of
the Fund.
First Trust serves
as advisor or sub-advisor for 9 mutual fund portfolios, 10
exchange-traded funds consisting of 201 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.
John Gambla and Rob
Guttschow are the Fund’s portfolio managers and are jointly and primarily responsible
for the day-to-day management of the Fund’s investment portfolio.
•
Mr. Gambla, CFA, is a Senior Vice
President and Co-head of the First Trust Alternatives Investment Team. John has
over 26 years of investment experience spanning multiple asset classes and
investment styles. John currently manages the First Trust Long/Short Equity ETF,
the
First Trust Global
Tactical Commodity Strategy ETF, the First Trust Alternative Absolute Return
Strategy ETF, the First Trust Managed Futures ETF, as well as various
risk-managed and option-based strategies and overlays. Prior to joining First
Trust in 2011, John was Co-Chief Investment Officer at
Nuveen HydePark Group LLC and was responsible for investment activities,
research systems and infrastructure development. John also held a variety of positions
at Nuveen Investments. John has extensive experience in portfolio management,
derivatives, risk management and quantitative data analysis. John began his
career in Finance at Abbott Laboratories. John graduated Phi Beta Kappa with a Bachelor of
Science in Genetics and Developmental Biology and a Bachelor of Arts in Finance
from the University of Illinois at Urbana/Champaign and earned an MBA from the
University of Chicago’s Booth School of
Business. He is a CFA Charter Holder and holds FRM
and PRM designations.
19
•
Mr. Guttschow, CFA, is a Senior
Portfolio Manager and Co-head of the First Trust Alternatives Investment
Team. Rob has over 25 years of investment
experience spanning multiple asset classes and investment styles. Rob currently
manages the First Trust Long/Short Equity ETF, the First Trust Global Tactical
Commodity Strategy Fund, the First Trust Alternative Absolute Return Strategy
ETF, the First Trust Managed Futures Strategy, as well as various risk-managed
and option-based strategies and overlays. Prior to joining First Trust in 2011,
Rob
was Co-Chief Investment
Officer at Nuveen HydePark Group LLC and was responsible for
trading, portfolio management,
performance attribution, and research.
Previously, Rob was a Senior Portfolio Manager at
Nuveen Asset Management, where he developed Nuveen’s buy-side derivative desk
for fixed-income and equity-portfolio hedging. Rob started his career at Lotsoff
Capital Management where, at the time of his departure, he was a Partner and
Managing Director. At Lotsoff Capital Management, he managed approximately $1.5
billion in a various fixed-income and equity-based strategies. Rob received a BS
in Materials Engineering (Ceramics) and an MBA from the University of Illinois
at Champaign/Urbana in 1991 and 1993, respectively. Rob holds the Chartered
Financial Analysis designation and is a member of the CFA Institute and the CFA
Society of Chicago.
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 portfolio managers’ compensation, other accounts managed
by the portfolio managers and the portfolio managers’ ownership of shares in the
Fund is provided in the SAI.
Management
Fee
Pursuant to an
investment management agreement between First Trust and the Trust, on behalf of
the Fund (the “Investment
Management Agreement”),
First Trust manages the investment of the Fund's assets. 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, expenses
associated with short sales transactions, distribution and service fees payable
pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses.
As approved by the
Trust’s Board of Trustees, the management fee paid to First Trust will be
reduced at certain levels of Fund net assets (“breakpoints”). See the Fund's Statement of
Additional Information for more information on the breakpoints.
A discussion
regarding the Board’s approval of the continuation of the Investment Management
Agreement is available in the Fund's Annual Report to Shareholders
for the fiscal year ended October 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,
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.
20
For purposes of the
1940 Act, the Fund is treated as a registered investment company, and the acquisition of shares by
other registered investment companies and companies relying on Sections 3(c)(1)
and 3(c)(7) of the 1940 Act is subject to the restrictions of Section 12(d)(1)
of the 1940 Act and the related rules and interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is
the record owner of all outstanding shares of the Fund and is recognized as the
owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all
shares. Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that you hold in
book-entry or “street name” form.
Share
Trading Prices
The
trading price of shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and
can be affected by market forces of supply and demand, economic conditions and
other factors.
Frequent
Purchases and Redemptions of the Fund's Shares
The Fund imposes no
restrictions on the frequency of purchases and redemptions (“market
timing”). In determining
not to approve a written, established policy, the Board evaluated the risks of
market timing activities by the Fund's shareholders. The Board considered that
the Fund's shares can only be purchased and redeemed directly from the Fund in
Creation Units by broker-dealers and large institutional investors that have
entered into participation agreements (i.e., authorized participants
(“APs”)) and that the vast majority of
trading in the Fund's shares occurs on the secondary market. Because the
secondary market trades do not involve the Fund directly, it is unlikely those
trades would cause many of the harmful effects of market timing, including
dilution, disruption of portfolio management, increases in the Fund's trading
costs and the realization of capital gains. With respect to trades directly with
the Fund, to the extent effected in-kind (i.e., for securities), those trades do
not cause any of the harmful effects that may result from frequent cash trades.
To the extent that the Fund may effect the purchase or redemption of Creation
Units in exchange wholly or partially for cash, the Board noted that such trades
could result in dilution to the Fund and increased transaction costs, which
could negatively impact the Fund's ability to achieve its investment objective.
However, the Board noted that direct trading by APs is critical to ensuring that
the shares trade at or close to net asset value. In addition, the Fund imposes
fixed and variable transaction fees on purchases and redemptions of Creation
Units to cover the custodial and other costs incurred by the Fund in effecting
trades. Finally, the Advisor monitors purchase and redemption orders from APs
for patterns of abusive trading and the Fund reserves the right to not accept
orders from APs that the Advisor has determined may be disruptive to the
management of the Fund.
Dividends,
Distributions and Taxes
Dividends
from net investment income of 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.
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.
21
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.
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. Some portion of the ordinary income distributions that are attributable
to dividends received by the Fund from shares in certain real estate investment
trusts may be designated by the Fund as eligible for a deduction for qualified
business income, provided certain holding period requirements are satisfied.
Generally, you will treat all capital gain dividends as long-term capital gains
regardless of how long you have owned your shares. To determine your actual tax
liability for your capital gain dividends, you must calculate your total net
capital gain or loss for the tax year after considering all of your other
taxable transactions, as described below. In addition, the Fund may make
distributions that represent a return of capital for tax purposes and thus will
generally not be taxable to you; however, such distributions may reduce your tax
basis in your shares, which could result in you having to pay higher taxes in
the future when shares are sold, even if you sell the shares at a loss from your
original investment. A "return of capital" is a return, in whole or in part, of
the funds that you previously invested in the Fund. A return of capital
distribution should not be considered part of a Fund’s dividend yield or total
return of an investment in Fund shares. The tax status of your distributions
from the Fund is not affected by whether you reinvest your distributions in
additional shares or receive them in cash. The 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. The use of the long/short
strategy may reduce the amount of dividends that would otherwise be eligible for
the dividends received deduction.
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 income below certain thresholds). Some capital gains, including some
portion of your capital gain dividends may be taxed at a higher maximum stated
tax rate. Capital gains may also be subject to the Medicare tax described above.
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 addition, 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
22
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 28% tax rate or the 25% tax rate, will be made based on
rules prescribed by the United States Treasury.
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. 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.
The use of the long/short strategy may reduce the amount of dividends that would
otherwise be eligible for the capital gains tax rates.
Sale
of Shares
If you sell or
redeem your shares, you will generally recognize a taxable gain or loss. To
determine the amount of this gain or loss, you must subtract your tax
basis in your shares from the amount you receive in the transaction. Your tax
basis in your shares is generally equal to the cost of your shares, generally
including brokerage fees, if any. In some cases, however, you may have to adjust
your tax basis after you purchase your shares. An election may be available to
you to defer recognition of capital gain if you make certain qualifying
investments within a limited time. You should talk to your tax advisor about the
availability of this deferral election and its requirements.
Taxes
on Purchase and Redemption of Creation Units
If you exchange
securities for Creation Units, you will generally recognize a gain or a loss.
The gain or loss will be equal to the difference between the market value
of the Creation Units at the time and your aggregate basis in the securities
surrendered and the cash component paid. If you exchange Creation Units for
securities, you will generally recognize a gain or loss equal to the difference
between your basis in the Creation Units and the aggregate market value of the
securities received and the cash redemption amount. The IRS, however, may assert
that a loss realized upon an exchange of securities for Creation Units or
Creation Units for securities cannot be deducted currently under the rules
governing “wash sales,” or on the basis that there has been no significant
change in economic position.
Treatment
of Fund Expenses
Expenses incurred and
deducted by the Fund will generally not be treated as income taxable to
you.
Non-U.S.
Tax Credit
Because
the Fund invests 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
23
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 February 28, 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
is open for business. Net asset value is calculated for the Fund by taking the
market price of the Fund’s total assets, including interest or dividends accrued
but not yet collected, less all liabilities, and dividing such amount by the
total number of shares outstanding. The result, rounded to the nearest cent, is
the net asset value per share. All valuations are subject to review by the Board
or its delegate.
The Fund’s
investments are valued daily in accordance with valuation procedures
approved by the Board,
and in accordance with provisions of the 1940 Act and the rules thereunder. Rule
2a-5 under the 1940 Act requires the fair valuation of all portfolio
24
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. 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 approved by the Board and in accordance
with the 1940 Act and the rules thereunder. 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. 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. For portfolio securities traded on an exchange
that provides both an official closing price and a last sale price, the Advisor,
at its discretion, shall determine to use either the last sale price or the
official closing price, depending on which price reflects the appropriate market
value. Portfolio securities traded in the over-the-counter market, but excluding
securities trading on Nasdaq or the AIM, are 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 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 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) 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 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
Brown
Brothers Harriman & Co., 50 Post Office Square, Boston, Massachusetts 02110,
acts as the administrator, accounting agent, custodian 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.
25
Premium/Discount
Information
Information
showing the number of days the market price of the Fund's shares was greater (at
a premium) and less (at a discount) than the Fund's net
asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter),
is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Total
Return Information
The table below
compares the total return of the Fund to a broad-based market index. 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 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 Long/Short Equity ETF (FTLS)
Total Returns as of October 31, 2022
Total Returns as of October 31, 2022
|
|
|
Average
Annual |
Cumulative | ||
|
|
1
Year |
5
Years |
Inception
(9/8/2014) |
5
Years |
Inception
(9/8/2014) |
|
Fund
Performance |
|
|
|
|
|
|
Net Asset
Value |
-2.74% |
5.76% |
6.79% |
32.33% |
70.80% |
|
Market
Price |
-2.76% |
5.77% |
6.80% |
32.35% |
70.86% |
|
Index
Performance |
|
|
|
|
|
|
S&P
500®
Index |
-14.61% |
10.44% |
10.51% |
64.31% |
125.69% |
26
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, 2022 and is incorporated by reference in the Fund's SAI, which is
available upon request.
First
Trust Exchange-Traded Fund III
Financial
Highlights
For a share outstanding throughout each period
For a share outstanding throughout each period
First
Trust Long/Short Equity ETF (FTLS)
|
|
Year
Ended October 31, | ||||
|
|
2022 |
2021 |
2020 |
2019 |
2018 |
|
Net
asset value, beginning of period |
$50.26 |
$41.86 |
$41.67 |
$38.47 |
$37.78 |
|
Income
from investment operations: |
|
|
|
|
|
|
Net
investment income (loss) |
0.19 |
(0.10) |
0.05 |
0.39 |
0.26 |
|
Net
realized and unrealized gain (loss) |
(1.56) |
8.63 |
0.25 |
3.23 |
0.67 |
|
Total
from investment operations |
(1.37) |
8.53 |
0.30 |
3.62 |
0.93 |
|
Distributions
paid to shareholders from: |
|
|
|
|
|
|
Net
investment income |
(0.07) |
(0.13) |
(0.11) |
(0.42) |
(0.24) |
|
Net
asset value, end of period |
$48.82 |
$50.26 |
$41.86 |
$41.67 |
$38.47 |
|
Total
Return (a) |
(2.74)% |
20.41% |
0.74% |
9.49% |
2.45% |
|
Ratios
to average net assets/supplemental data: |
|
|
|
|
|
|
Net
assets, end of period (in 000’s) |
$524,765 |
$429,755 |
$301,375 |
$245,867 |
$155,803 |
|
Ratio of
total expenses to average net assets (b) |
1.41% |
1.36% |
1.55% |
1.60% |
1.59% |
|
Ratio of
total expenses to average net assets excluding dividend
expense
and margin interest expense (b)
|
0.95% |
0.95% |
0.95% |
0.95% |
0.95% |
|
Ratio of
net investment income (loss) to average net assets |
0.40% |
(0.28)% |
0.09% |
1.03% |
0.71% |
|
Portfolio
turnover rate (c) |
223% |
250% |
250% |
210% |
249% |
(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)
The
Fund indirectly bears its proportionate share of fees and expenses incurred by
the underlying funds in which the Fund invests. This ratio does not include
these indirect fees and expenses.
(c)
Portfolio
turnover is calculated for the time period presented and is not annualized for
periods of less than a year and does not include securities received or
delivered from processing creations or redemptions and in-kind
transactions.
27
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.
28
|
First
Trust
Exchange-Traded
Fund III |
First
Trust Long/Short Equity ETF
For
More Information
For
more detailed information on the Fund, several additional sources of information
are available to you. The SAI, incorporated by
reference into this prospectus, contains detailed information on the Fund's
policies and operation. Additional information about the Fund's investments is
available in the annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly impacted the Fund's performance during
the last fiscal year. The Fund's most recent SAI, annual and semi-annual reports
and certain other information are available free of charge by calling the Fund
at (800) 621-1675, on the Fund's website at www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You
may obtain this and other information regarding the Fund, including the SAI and
the Codes of Ethics adopted by First Trust, FTP
and the Trust, directly from the Securities and Exchange Commission (the
"SEC"). Information on
the SEC’s website is free of charge. Visit the SEC’s online EDGAR database at
www.sec.gov. You may also request information regarding the Fund by sending a
request (along with a duplication fee) to the SEC by sending an electronic
request to [email protected].
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
SEC
File #: 333-176976
811-22245
811-22245