FIRST TRUST
First Trust Exchange-Traded Fund II
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Book 2
First Trust IPOX(R) Europe Equity Opportunities ETF (FPXE)
First Trust Dow Jones International Internet ETF (FDNI)
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Annual Report
for the Year Ended
September 30, 2021
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TABLE OF CONTENTS
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FIRST TRUST EXCHANGE-TRADED FUND II
ANNUAL REPORT
SEPTEMBER 30, 2021
Shareholder Letter ...................................................................... 2
Market Overview ......................................................................... 3
Fund Performance Overview
First Trust IPOX(R) Europe Equity Opportunities ETF (FPXE) ........................ 4
First Trust Dow Jones International Internet ETF (FDNI) ........................... 6
Notes to Fund Performance Overview ...................................................... 8
Understanding Your Fund Expenses ........................................................ 9
Portfolio of Investments
First Trust IPOX(R) Europe Equity Opportunities ETF (FPXE) ........................ 10
First Trust Dow Jones International Internet ETF (FDNI) ........................... 13
Statements of Assets and Liabilities .................................................... 15
Statements of Operations ................................................................ 16
Statements of Changes in Net Assets ..................................................... 17
Financial Highlights .................................................................... 18
Notes to Financial Statements ........................................................... 19
Report of Independent Registered Public Accounting Firm ................................. 26
Additional Information .................................................................. 27
Board of Trustees and Officers .......................................................... 33
Privacy Policy .......................................................................... 35
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
any series of First Trust Exchange-Traded Fund II (the "Trust") described in
this report (each such series is referred to as a "Fund" and collectively, as
the "Funds") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that any Fund described in this report will achieve its
investment objective. Each Fund is subject to market risk, which is the
possibility that the market values of securities owned by the Fund will decline
and that the value of the Fund's shares may therefore be less than what you paid
for them. Accordingly, you can lose money by investing in a Fund. See "Risk
Considerations" in the Additional Information section of this report for a
discussion of other risks of investing in the Funds.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
www.ftportfolios.com or speak with your financial advisor. Investment returns,
net asset value and share price will fluctuate and Fund shares, when sold, may
be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on each Fund's webpage at www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about each Fund and presents data and analysis that provide
insight into each Fund's performance and investment approach.
By reading the market overview by Robert F. Carey, Chief Market Strategist of
the Advisor, you may obtain an understanding of how the market environment
affected the performance of each Fund. The statistical information that follows
may help you understand each Fund's performance compared to that of relevant
market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in each
Fund are spelled out in its prospectus, statement of additional information, and
other Fund regulatory filings.
Page 1
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SHAREHOLDER LETTER
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FIRST TRUST EXCHANGE-TRADED FUND II
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
SEPTEMBER 30, 2021
Dear Shareholders,
First Trust is pleased to provide you with the annual report for certain series
of the First Trust Exchange-Traded Fund II (the "Funds"), which contains
detailed information about the Funds for the twelve months ended September 30,
2021.
A great deal has changed over the past 18 months. Suffice it to say that the
dominant story in 2020 was the onset of the coronavirus ("COVID-19") pandemic.
It is still a huge story 20 months later, mostly due to the arrival of the Delta
variant in the U.S. and the subsequent surge in cases around mid-2021. The Delta
variant is twice as contagious as the previous variants, according to the
Centers for Disease Control and Prevention ("CDC"). Fortunately, we have come to
learn that the existing vaccines approved by the U.S. Food and Drug
Administration have been effective in providing protection against the Delta
variant, particularly with respect to keeping the people already vaccinated out
of the intensive care unit. As I'm sure you are aware, a significant percentage
of the U.S. population has chosen not to be vaccinated. These individuals have
proven to be much more vulnerable to the virus and account for the lion's share
of hospitalizations, according to the CDC. While it is these individuals right
to choose, unless mandated by a private company or government agency, the
universe of people that have not gotten vaccinated is large enough that it has
likely delayed the full economic recovery, at least on the margin, in our
opinion. In the U.S., the path chosen by the federal government to help mitigate
the economic fallout from the pandemic has been to inject trillions of dollars
of liquidity (stimulus) into the financial system. To date, it appears to have
been effective, however, it has contributed to a new and potentially ominous
headwind for the economy: inflation.
The Consumer Price Index came in at 5.4% year-over-year in September 2021, the
largest increase since 2008, according to data from the Bureau of Labor
Statistics ("BLS"). The BLS also reported that the Producer Price Index was up
8.6% compared to a year ago, its highest level since 1981. These two barometers
of inflation are clearly elevated. Why is rising inflation worth noting? It
tends to reduce the purchasing power of the currency one uses over time. In the
case of the U.S., it reduces how much consumers can buy with their dollars. A
modest amount of inflation can be a sign that the economy is healthy. Too much
inflation can derail an economy. While we are not even close to that point yet,
investors should monitor the direction of inflation moving forward because the
U.S. economy has yet to fully reopen from the COVID-19 pandemic and millions of
workers remain on the sideline. Earlier this year, Federal Reserve Chairman
Jerome Powell proclaimed that the spike in inflation in the U.S. would be
relatively short-lived, or "transitory." He cited the pandemic-related
bottlenecks in the global supply chain for creating shortages in such critical
industries as semiconductors as being largely responsible for the sharp rise in
prices. With prices rising nearly across the board, his take on inflation is
losing credibility with each passing month, in my opinion. If inflation
continues to run hotter-than-expected, we believe that the Federal Reserve will
likely have to alter its easy monetary policy in favor of one that boosts
interest rates and bond yields.
The markets have performed quite well over the past 18 months. I believe that
the combination of the federal government's efforts in fast-tracking the
vaccines, its decisiveness in injecting trillions of dollars of capital into the
financial system to help backstop it, and the ability of millions of workers to
adapt to working efficiently from home helped boost the confidence levels of
investors throughout. Having said that, I still feel we need to fully reopen the
U.S. economy, put the millions of people out of work back to work and remedy the
global supply chain bottlenecks. While investors should be prepared for the
possibility of some additional volatility moving forward, due to inflationary
pressures, the potential for higher interest rates and bond yields, and next
year's mid-term election season, we encourage them to stay the course.
Thank you for giving First Trust the opportunity to play a role in your
financial future. We value our relationship with you and will report on the
Funds again in six months.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 2
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MARKET OVERVIEW
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FIRST TRUST EXCHANGE-TRADED FUND II
ANNUAL REPORT
SEPTEMBER 30, 2021
ROBERT F. CAREY, CFA
SENIOR VICE PRESIDENT AND CHIEF MARKET STRATEGIST
FIRST TRUST ADVISORS L.P.
Mr. Carey is responsible for the overall management of research and analysis of
the First Trust product line. Mr. Carey has more than 30 years of experience as
an Equity and Fixed-Income Analyst and is a recipient of the Chartered Financial
Analyst ("CFA") designation. He is a graduate of the University of Illinois at
Champaign-Urbana with a B.S. in Physics. He is also a member of the Investment
Analysts Society of Chicago and the CFA Institute. Mr. Carey has appeared as a
guest on such programs as Bloomberg TV, CNBC, and WBBM Radio, and has been
quoted by several publications, including The Wall Street Journal, The Wall
Street Reporter, Bloomberg News Service and Registered Rep.
STATE OF THE GLOBAL ECONOMY
The International Monetary Fund ("IMF") reported in its latest release that
global gross domestic product ("GDP") growth is expected to come in at 5.9% in
2021 and 4.9% in 2022, up from -3.1% in 2020. Keep in mind that the onset of the
coronavirus ("COVID-19") pandemic in the U.S. and most global regions occurred
in the first quarter of 2020. The IMF sees the U.S. economy growing at 6.0% in
2021 and 5.2% in 2022, up from -3.4% in 2020. With respect to all Advanced
Economies, the IMF is projecting GDP growth of 5.2% in 2021 and 4.5% in 2022, up
from -4.5% in 2020. Lastly, the IMF projects Emerging Market and Developing
Economies to grow at a rate of 6.4% in 2021 and 5.1% in 2022, up from -2.1% in
2020. Looking ahead to 2022, the outlook for growth is encouraging, but down a
bit from the strong pandemic-induced recovery in 2021. The IMF is concerned that
inflationary pressures stemming from the global supply chain bottlenecks could
push prices higher if the problems persist. That scenario could, in turn, cause
central banks to raise rates quickly to try and prevent inflation from
overheating.
One of the better barometers for judging the overall business climate is mergers
and acquisitions ("M&A") activity, in our opinion. M&A deals totaled $4.3
trillion over the first nine months of 2021, the most ever recorded for that
period, according to data from Refinitiv. The $1.52 trillion in deal value
registered in the third quarter of 2021 was the highest ever for a calendar
quarter. Executives are expanding their businesses aggressively in the current
climate.
PERFORMANCE OF GLOBAL STOCKS AND BONDS
U.S. equities performed extremely well over the past year. The S&P 500(R), S&P
MidCap 400(R) and S&P SmallCap 600(R) Indices posted total returns of 30.00%,
43.68% and 57.64%, respectively, for the 12-month period ended September 30,
2021. Small- and mid-capitalization ("cap") stocks significantly outperformed
large-cap stocks over the period, an indication that investors were willing to
assume more risk despite the ongoing COVID-19 pandemic, in our opinion. All 11
sectors that comprise the S&P 500(R) Index were up on a total return basis. The
top-performer was the Energy sector, up 82.99%, while the worst result came from
the Utilities sector, up just 11.01%.
A Bloomberg survey of 21 equity strategists found that their average 2021
year-end price target for the S&P 500(R) Index was 4,466 as of September 21,
2021, up from 4,335 on August 20, 2021, according to its own release. The
highest and lowest estimates were 4,825 (up from 4,700) and 3,800 (unchanged),
respectively. On September 30, 2021, the S&P 500(R) Index closed at 4,307.54,
which was 5.06% below its all-time closing high of 4,536.95 on September 2,
2021. As of October 1, 2021, Bloomberg's 2021, 2022 and 2023 consensus earnings
growth rate estimates for the S&P 500(R) Index stood at 44.90%, 8.95% and 9.80%,
respectively.
Foreign equities also performed well, but the broader indices continue to lag
the performance of the major U.S. stock indices. Over the past 12 months, the
MSCI World ex USA and MSCI Emerging Markets Indices posted total returns of
26.50% (USD) and 18.20% (USD), respectively, according to Bloomberg. The major
foreign bond indices had mixed results. The Bloomberg Global Aggregate Index of
higher quality debt posted a total return of -0.91% (USD), while the Bloomberg
EM Hard Currency Aggregate Index of emerging markets debt rose by 3.15% (USD),
according Bloomberg. Over that same period, the U.S. dollar rose by 0.36%
against a basket of major currencies, as measured by the U.S. Dollar Index
(DXY). The slight bump in the dollar had little influence on the performance of
these foreign indices, in our opinion.
In the U.S. bond market, the top-performing major debt group we track was
speculative-grade corporate bonds. The Bloomberg U.S. Corporate High Yield Index
posted a total return of 11.28% for the 12-month period ended September 30,
2021. The worst-performing U.S. debt group that we track was government bonds.
The Bloomberg U.S. Treasury: Intermediate Index posted a total return of -1.38%.
The yield on the benchmark 10-Year Treasury Note ("T-Note") rose by 80 basis
points in the period to close at 1.49% on September 30, 2021, according to
Bloomberg. For comparative purposes, the average yield on the 10-Year T-Note was
2.04% for the 10-year period ended September 30, 2021.
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE)
The First Trust IPOX(R) Europe Equity Opportunities ETF (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the IPOX(R) 100 Europe Index
(the "Index"). The shares of the Fund are listed and trade on The Nasdaq Stock
Market LLC under the ticker symbol "FPXE." The Fund will normally invest at
least 90% of its net assets (including investment borrowings) in the common
stocks and depositary receipts that comprise the Index. The Index is owned,
developed, maintained and sponsored by IPOX(R) Schuster LLC. The Index seeks to
measure the performance of the equity securities of the 100 largest and
typically most liquid initial public offerings ("IPOs") (including spin-offs and
equity carve-outs) of companies that are economically tied to Europe.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
Inception Inception
1 Year Ended (10/4/18) (10/4/18)
9/30/21 to 9/30/21 to 9/30/21
FUND PERFORMANCE
NAV 24.19% 17.39% 61.47%
Market Price 23.63% 17.41% 61.56%
INDEX PERFORMANCE
IPOX(R) 100 Europe Index 25.58% 18.87% 67.66%
MSCI Europe Index 27.25% 8.44% 27.39%
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(See Notes to Fund Performance Overview on page 8.)
PERFORMANCE REVIEW
The Fund generated a net asset value ("NAV") return of 24.19% during the period
covered by this report. During the same period, the MSCI Europe Index (the
"Benchmark") generated a return of 27.25%. Over the period, the Fund allocated
24.7% to the Consumer Discretionary sector, which was more than the weight given
to any other sector. Investments in the Consumer Discretionary sector returned
23.5% during the period, contributing 5.3% to the Fund's return. Securities from
the Health Care sector provided a greater contribution to the Fund's return than
any other sector during the same period. With a 17.5% allocation, Health Care
securities returned 42.4% and contributed 6.3% to the Fund's total return.
Investments in the Consumer Staples sector caused the greatest drag on the
Fund's portfolio. This sector received a 2.7% allocation during the period and
contributed -0.2% to the Fund's total return, stemming from its -8.1% return.
The Fund's currency exposure caused 0.03% of performance during the period. On a
relative basis, the Fund underperformed the Benchmark. The leading cause of the
underperformance was attributable to the Fund underperforming the Benchmark
among securities from the Consumer Discretionary sector. The Fund underperformed
the Benchmark by -12.5%, which created -2.9% of relative drag. The Communication
Services sector, likewise, created -2.1% of relative drag as the Fund
underperformed the Benchmark by -33.7%. The Fund reversed 3.7% of relative drag
as it outperformed the Benchmark among securities from the Health Care sector by
30.2%.
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IPOX(R) and the Index are registered international trademarks of IPOX(R)
Schuster LLC ("IPOX") and have been licensed for use by First Trust. The Fund is
not sponsored, endorsed, sold or promoted by IPOX, and IPOX makes no
representation regarding the advisability of trading in such Fund.
Page 4
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE) (CONTINUED)
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% OF TOTAL
SECTOR CLASSIFICATION LONG-TERM INVESTMENTS
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Information Technology 24.1%
Health Care 17.6
Consumer Discretionary 16.3
Industrials 15.0
Financials 10.8
Communication Services 6.9
Consumer Staples 3.8
Utilities 2.2
Materials 1.6
Real Estate 1.5
Energy 0.2
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Total 100.0%
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% OF TOTAL
TOP TEN HOLDINGS LONG-TERM INVESTMENTS
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Adyen N.V. 7.9%
Siemens Healthineers AG 7.8
Prosus N.V. 3.6
BioNTech SE, ADR 3.5
Dassault Systemes SE 3.2
Nexi S.p.A. 2.9
DSV A/S 2.7
NXP Semiconductors N.V. 2.7
NatWest Group PLC 2.6
Universal Music Group N.V. 2.3
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Total 39.2%
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
OCTOBER 4, 2018 - SEPTEMBER 30, 2021
First Trust IPOX(R)
Europe Equity IPOX(R) 100 MSCI Europe
Opportunities ETF Europe Index Index
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10/4/18 $10,000 $10,000 $10,000
3/31/19 9,715 9,769 9,836
9/30/19 10,132 10,255 10,091
3/31/20 9,587 9,800 8,311
9/30/20 13,003 13,352 10,011
3/31/21 14,757 15,217 12,046
9/30/21 16,147 16,766 12,739
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
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.
Page 5
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST DOW JONES INTERNATIONAL INTERNET ETF (FDNI)
The First Trust Dow Jones International Internet ETF (the "Fund") seeks
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of an equity index called the Dow Jones International
Internet Index (the "Index"). The shares of the Fund are listed and trade on The
Nasdaq Stock Market LLC under the ticker symbol "FDNI." The Fund will normally
invest at least 90% of its net assets (including investment borrowings) in the
common stocks and depositary receipts that comprise the Index. The Index is
developed, maintained and sponsored by S&P Dow Jones Indices LLC and is designed
to measure the performance of securities of non-US issuers whose primary
business focus is Internet-related.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
Inception Inception
1 Year Ended (11/5/18) (11/5/18)
9/30/21 to 9/30/21 to 9/30/21
FUND PERFORMANCE
NAV 2.42% 29.21% 110.31%
Market Price 2.11% 29.13% 109.96%
INDEX PERFORMANCE
Dow Jones International Internet Index 3.57% 30.25% 115.28%
MSCI ACWI ex-USA Information Technology Index 36.71% 29.65% 112.44%
MSCI ACWI ex-USA Index 23.92% 10.91% 35.06%
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(See Notes to Fund Performance Overview on page 8.)
PERFORMANCE REVIEW
The Fund generated a NAV return of 2.42% during the period covered by this
report. During the same period, the MSCI ACWI ex-USA Information Technology
Index (the "Benchmark") generated a return of 36.71%. Over the period, the Fund
was most heavily weighted towards the Consumer Discretionary sector. This sector
received an allocation of 41.9% and contributed -5.9% to the Fund's overall
return, as a result of the sector's -16.4% return in the Fund. The greatest
contributing sector to the Fund's return was the Information Technology sector,
which was given a 19.8% allocation and had a 41.5% return, leading to a 6.4%
contribution to the Fund's performance. The Fund's currency exposure caused 0.7%
of performance during the period. On a relative basis, the Fund underperformed
the Benchmark during the period. The Benchmark invests solely in securities from
the Information Technology sector, while the Fund invested 41.9% in the Consumer
Discretionary sector, 34.6% in the Communication Services sector, and only 19.8%
in the Information Technology sector. The investments in the Consumer
Discretionary sector caused -24.2% of relative underperformance for the Fund due
to the Fund over allocating this poor performing sector. The Fund's allocation
to the Information Technology sector reversed 0.8% of relative underperformance
as the Fund outperformed the Benchmark by 4.3%.
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Dow Jones International Internet Index ("Index") is a product of S&P Dow Jones
Indices LLC or its affiliates ("SPDJI") and has been licensed for use by First
Trust. S&P(R) is a registered trademark of Standard & Poor's Financial Services
LLC ("S&P"); Dow Jones(R) is a registered trademark of Dow Jones Trademark
Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by
SPDJI and sublicensed for certain purposes by First Trust. The Fund is not
sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their
respective affiliates and none of such parties make any representation regarding
the advisability of investing in such product nor do they have any liability for
any errors, omissions, or interruptions of the Index.
Page 6
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST DOW JONES INTERNATIONAL INTERNET ETF (FDNI) (CONTINUED)
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% OF TOTAL
SECTOR CLASSIFICATION LONG-TERM INVESTMENTS
-----------------------------------------------------------
Consumer Discretionary 40.3%
Communication Services 35.1
Information Technology 22.5
Health Care 2.1
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Total 100.0%
======
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% OF TOTAL
TOP TEN HOLDINGS LONG-TERM INVESTMENTS
-----------------------------------------------------------
Shopify, Inc., Class A 10.4%
Tencent Holdings Ltd. 10.1
Alibaba Group Holding Ltd., ADR 9.9
Meituan, Class B 8.7
Prosus N.V. 4.7
Sea Ltd., ADR 4.7
Adyen N.V. 4.4
JD.com, Inc., ADR 4.4
Atlassian Corp. PLC, Class A 3.6
NAVER Corp. 3.2
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Total 64.1%
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 5, 2018 - SEPTEMBER 30, 2021
MSCI All Country World MSCI All
First Trust Dow Jones Dow Jones International ex-USA Information Country World
International Internet ETF Internet Index Technology Index ex-USA Index
-------------------------- ----------------------- ---------------------------- -------------
11/5/18 $10,000 $10,000 $10,000 $10,000
3/31/19 11,275 11,318 10,863 10,463
9/30/19 10,907 10,977 11,546 10,581
3/31/20 11,865 12,008 11,000 8,834
9/30/20 20,535 20,785 15,539 10,899
3/31/21 23,574 24,042 20,050 13,199
9/30/21 21,033 21,527 21,243 13,505
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
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.
Page 7
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NOTES TO FUND PERFORMANCE OVERVIEW (UNAUDITED)
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Total returns for the periods since inception are calculated from the inception
date of each Fund. "Average Annual Total Returns" represent the average change
in value of an investment over the periods indicated. "Cumulative Total Returns"
represent the total change in value of an investment over the periods indicated.
Each Fund's per share net asset value ("NAV") 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 all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. 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 NAV 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 NAV 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 NAV was calculated. Since shares of each Fund did
not trade in the secondary market until after the Fund's inception, for the
period from inception to the first day of secondary market trading in shares of
the Fund, the NAV of each Fund is used as a proxy for the secondary market
trading price to calculate market returns. NAV and market returns assume that
all distributions have been reinvested in each Fund at NAV and Market Price,
respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike each Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by each Fund. These
expenses negatively impact the performance of each 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 presented reflect the reinvestment of dividends on
securities in the indices. 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. The investment return and principal value of shares of each
Fund will vary with changes in market conditions. Shares of each Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. Each Fund's past performance is no guarantee of future performance.
Page 8
FIRST TRUST EXCHANGE-TRADED FUND II
UNDERSTANDING YOUR FUND EXPENSES
SEPTEMBER 30, 2021 (UNAUDITED)
As a shareholder of First Trust IPOX(R) Europe Equity Opportunities ETF or First
Trust Dow Jones International Internet ETF (each a "Fund" and collectively, the
"Funds"), you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service (12b-1) fees, if
any, and other Fund expenses. This Example is intended to help you understand
your ongoing costs (in U.S. dollars) of investing in the Funds and to compare
these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended September 30, 2021.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on each Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
each Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Funds and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
APRIL 1, 2021 SEPTEMBER 30, 2021 PERIOD PERIOD (a)
------------------------------------------------------------------------------------------------------------------------
FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE)
Actual $1,000.00 $1,094.40 0.70% $3.68
Hypothetical (5% return before expenses) $1,000.00 $1,021.56 0.70% $3.55
FIRST TRUST DOW JONES INTERNATIONAL INTERNET ETF (FDNI)
Actual $1,000.00 $ 892.20 0.65% $3.08
Hypothetical (5% return before expenses) $1,000.00 $1,021.81 0.65% $3.29
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (April 1,
2021 through September 30, 2021), multiplied by 183/365 (to reflect the
six-month period).
Page 9
FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE)
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 2021
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
COMMON STOCKS (a) -- 99.9%
AUSTRIA -- 0.8%
354 ANDRITZ AG (b) $ 19,401
1,063 BAWAG Group AG (b) (c) (d) 67,274
--------------
86,675
--------------
BELGIUM -- 1.6%
660 D'ieteren Group (b) 96,847
663 UCB S.A. (b) 74,241
--------------
171,088
--------------
BERMUDA -- 0.2%
942 Myovant Sciences Ltd. (e) 21,138
--------------
CYPRUS -- 1.1%
2,416 HeadHunter Group PLC, ADR 117,901
--------------
DENMARK -- 5.0%
1,186 DSV A/S (b) 283,886
2,798 Genmab A/S, ADR (e) 122,272
511 Netcompany Group A/S (b) (c) (d) 58,941
3,323 Scandinavian Tobacco Group
A/S (b) (c) (d) 65,583
--------------
530,682
--------------
FINLAND -- 0.7%
64 Harvia OYJ (b) (d) 3,399
632 Kojamo OYJ (b) 13,123
229 Musti Group OYJ (b) 8,172
1,309 Terveystalo OYJ (c) (d) 16,376
404 TietoEVRY OYJ (b) 12,150
803 Tokmanni Group Corp. (b) 19,529
--------------
72,749
--------------
FRANCE -- 7.8%
2,109 Danone S.A. (b) 143,787
6,578 Dassault Systemes SE (b) 346,169
2,929 La Francaise des Jeux
SAEM (b) (c) (d) 150,601
893 Pernod Ricard S.A. (b) 196,873
--------------
837,430
--------------
GERMANY -- 17.2%
1,364 BioNTech SE, ADR (e) 372,358
184 Dermapharm Holding SE (b) 17,707
682 DWS Group GmbH & Co.
KGaA (b) (c) (d) 28,647
2,074 HelloFresh SE (b) (e) 191,154
549 Knorr-Bremse AG (b) 58,738
12,879 Siemens Healthineers
AG (b) (c) (d) 835,271
4,989 Uniper SE (b) 207,689
3,706 Vantage Towers AG 125,866
--------------
1,837,430
--------------
IRELAND -- 1.7%
5,730 nVent Electric PLC 185,251
--------------
ISRAEL -- 4.2%
436 Global-e Online Ltd. (e) 31,305
1,041 Inmode Ltd. (e) 165,988
946 Kornit Digital Ltd. (e) 136,924
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
ISRAEL (CONTINUED)
150 Monday.com Ltd. (e) (f) $ 48,930
410 Riskified Ltd., Class A (e) 9,352
1,176 ZIM Integrated Shipping Services
Ltd. 59,623
--------------
452,122
--------------
ITALY -- 4.3%
4,830 Italgas S.p.A. (b) 30,884
16,394 Nexi S.p.A. (b) (c) (d) (e) 305,709
17,042 Pirelli & C S.p.A. (b) (c) (d) 99,700
1,008 Stevanato Group S.p.A. (e) 25,512
--------------
461,805
--------------
JERSEY -- 0.9%
2,350 Janus Henderson Group PLC 97,125
--------------
LUXEMBOURG -- 1.4%
545 Befesa S.A. (b) (c) (d) 41,449
488 Spotify Technology S.A. (e) 109,966
--------------
151,415
--------------
NETHERLANDS -- 19.8%
301 Adyen N.V. (b) (c) (d) (e) 841,402
297 Alfen Beheer BV (b) (c) (d) (e) 31,349
5,413 CTP N.V. (b) (c) (d) 117,575
971 IMCD N.V. (b) 185,829
294 MYT Netherlands Parent BV,
ADR (e) 7,909
1,446 NXP Semiconductors N.V. 283,228
4,781 Prosus N.V. (b) 382,675
1,226 Technip Energies N.V. (b) (e) 19,224
9,374 Universal Music Group N.V. 250,990
--------------
2,120,181
--------------
NORWAY -- 1.8%
3,549 Adevinta ASA (b) (e) 60,817
572 Crayon Group Holding
ASA (b) (c) (d) (e) 10,718
19,615 Elkem ASA (b) (c) (d) 84,594
3,415 Europris ASA (b) (c) (d) 22,613
1,246 Pexip Holding ASA (b) (e) 10,056
--------------
188,798
--------------
SPAIN -- 0.1%
7,419 Linea Directa Aseguradora SA
Cia de Seguros y Reaseguros (b) 14,632
--------------
SWEDEN -- 14.3%
322 Ambea AB (c) (d) 2,358
983 BICO Group AB (b) (e) 58,194
1,386 Bravida Holding AB (b) (c) (d) 18,706
682 Cibus Nordic Real Estate AB 16,126
468 Cint Group AB (b) (e) 5,296
5,799 EQT AB (b) 240,796
1,356 Evolution AB (b) (c) (d) 205,352
621 Instalco AB (b) (d) 28,395
7,741 Lifco AB, Class B (b) 207,918
3,083 Medicover AB, Class B (b) 82,559
892 MIPS AB (b) (d) 89,455
5,965 Nordnet AB publ (b) 106,856
Page 10 See Notes to Financial Statements
FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2021
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
COMMON STOCKS (a) (CONTINUED)
SWEDEN (CONTINUED)
977 Nyfosa AB $ 13,816
431 Olink Holding AB, ADR (e) 10,452
9,909 Sinch AB (b) (c) (d) (e) 192,155
7,059 Tele2 AB, Class B (b) 104,521
2,851 Thule Group AB (b) (c) (d) 142,939
--------------
1,525,894
--------------
SWITZERLAND -- 3.2%
341 Galenica AG (b) (c) (d) 24,056
141 PolyPeptide Group
AG (b) (c) (d) (e) 17,923
159 Sensirion Holding
AG (b) (c) (d) (e) 19,326
2,876 SIG Combibloc Group AG (b) 76,471
511 VAT Group AG (b) (c) (d) 201,677
--------------
339,453
--------------
UNITED KINGDOM -- 11.6%
51,236 Airtel Africa PLC (c) (d) 68,828
1,399 AJ Bell PLC 7,521
8,581 Allfunds Group PLC (b) (e) 166,828
307 Auction Technology Group
PLC (e) 5,502
3,525 Avast PLC (b) (c) (d) 26,939
869 Bicycle Therapeutics PLC,
ADR (e) 36,142
5,208 Biffa PLC (c) (d) (e) 25,262
2,806 Bridgepoint Group PLC (c) (d) (e) 19,055
5,944 Darktrace PLC (e) 65,673
5,853 Deliveroo PLC (c) (d) (e) 22,807
1,311 Endava PLC, ADR (e) 178,099
1,532 Finablr PLC (b) (c) (e) (g) (h) 0
3,117 Forterra PLC (c) (d) 11,655
91,928 NatWest Group PLC (b) 277,150
22,015 Ninety One PLC 76,353
5,815 Quilter PLC (b) (c) (d) 11,151
4,157 THG PLC (b) (e) 28,381
3,279 Trustpilot Group
PLC (b) (c) (d) (e) 17,011
13,497 Virgin Money UK PLC (b) (e) 36,946
11,017 Wise PLC, Class A (e) 161,358
--------------
1,242,661
--------------
UNITED STATES -- 1.0%
3,053 Veoneer, Inc. (e) 103,985
--------------
VIRGIN ISLANDS -- 1.2%
2,591 Capri Holdings Ltd. (e) 125,430
--------------
TOTAL COMMON STOCKS -- 99.9% 10,683,845
(Cost $9,956,163) --------------
MONEY MARKET FUNDS -- 0.2%
22,196 Goldman Sachs Financial Square
Treasury Obligations Fund -
Institutional Class -
0.01% (i) (j) 22,196
(Cost $22,196) --------------
PRINCIPAL
VALUE DESCRIPTION VALUE
-------------------------------------------------------------
REPURCHASE AGREEMENTS -- 0.2%
$ 23,029 BNP Paribas S.A., 0.03% (i),
dated 09/30/21, due 10/01/21,
with a maturity value of
$23,029. Collateralized by
U.S. Treasury Notes, interest
rates of 0.375% to 0.750%, due
04/15/24 to 01/31/28. The
value of the collateral
including accrued interest is
$23,614. (j) $ 23,029
(Cost $23,029) --------------
TOTAL INVESTMENTS -- 100.3% 10,729,070
(Cost $10,001,388) (k)
NET OTHER ASSETS AND
LIABILITIES -- (0.3)% (37,141)
--------------
NET ASSETS -- 100.0% $ 10,691,929
==============
(a) Portfolio securities are categorized based upon their country of
incorporation, which can be different from the country categorization of
the Fund's underlying index. For a breakdown of the portfolio securities
by sector, please see the Fund Performance Overview.
(b) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees, and
in accordance with provisions of the Investment Company Act of 1940, as
amended. At September 30, 2021, securities noted as such are valued at
$7,545,409 or 70.6% of net assets. Certain of these securities are fair
valued using a factor provided by a third-party pricing service due to the
change in value between the foreign markets' close and the New York Stock
Exchange close exceeding a certain threshold. On days when this threshold
is not exceeded, these securities are typically valued at the last sale
price on the exchange on which they are principally traded.
(c) This security is exempt from registration upon resale under Rule 144A of
the Securities Act of 1933, as amended (the "1933 Act") and may be resold
in transactions exempt from registration, normally to qualified
institutional buyers. This security is not restricted on the foreign
exchange where it trades freely without any additional registration. As
such, it does not require the additional disclosure required of restricted
securities.
(d) This security may be resold to qualified foreign investors and foreign
institutional buyers under Regulation S of the 1933 Act.
(e) Non-income producing security.
(f) All or a portion of this security is on loan (see Note 2E - Securities
Lending in the Notes to Financial Statements). The remaining contractual
maturity of all of the securities lending transactions is overnight and
continuous. The aggregate value of such securities is $44,037 and the
total value of the collateral held by the Fund is $45,225.
(g) This security's value was determined using significant unobservable inputs
(see Note 2A - Portfolio Valuation in the Notes to Financial Statements).
See Notes to Financial Statements Page 11
FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2021
(h) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by First Trust Advisors, L.P.,
the Fund's advisor.
(i) Rate shown reflects yield as of September 30, 2021.
(j) This security serves as collateral for securities on loan.
(k) Aggregate cost for federal income tax purposes is $10,087,266. As of
September 30, 2021, the aggregate gross unrealized appreciation for all
investments in which there was an excess of value over tax cost was
$1,188,008 and the aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost over value was
$546,204. The net unrealized appreciation was $641,804.
ADR - American Depositary Receipt
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of September 30,
2021 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
9/30/2021 PRICES INPUTS INPUTS
----------------------------------------------------
Common Stocks:
Bermuda $ 21,138 $ 21,138 $ -- $ --
Cyprus 117,901 117,901 -- --
Denmark 530,682 122,272 408,410 --
Finland 72,749 16,376 56,373 --
Germany 1,837,430 498,224 1,339,206 --
Ireland 185,251 185,251 -- --
Israel 452,122 452,122 -- --
Italy 461,805 25,512 436,293 --
Jersey 97,125 97,125 -- --
Luxembourg 151,415 109,966 41,449 --
Netherlands 2,120,181 542,127 1,578,054 --
Sweden 1,525,894 42,752 1,483,142 --
United
Kingdom 1,242,661 678,255 564,406 --**
United States 103,985 103,985 -- --
Virgin Islands 125,430 125,430 -- --
Other Country
Categories* 1,638,076 -- 1,638,076 --
Money Market
Funds 22,196 22,196 -- --
Repurchase
Agreements 23,029 -- 23,029 --
----------------------------------------------------
Total
Investments $ 10,729,070 $ 3,160,632 $ 7,568,438 $ --**
====================================================
* See Portfolio of Investments for Country breakout.
** Investment is valued at $0.
Level 3 Common Stocks are fair valued by the Advisor's Pricing Committee and are
footnoted in the Portfolio of Investments.
Level 3 Common Stocks values are based on unobservable and non-quantitative
inputs.
---------------------------------
OFFSETTING ASSETS AND LIABILITIES
-------------------------------------------------------------
Offsetting assets and liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset, and to
disclose instruments and transactions subject to master netting or similar
agreements (see Note 2C - Offsetting on the Statements of Assets and Liabilities
in the Notes to Financial Statements).
The Fund's loaned securities were all subject to an enforceable Securities
Lending Agency Agreement. Securities lent in accordance with the Securities
Lending Agency Agreement on a gross basis were as follows:
SECURITIES LENDING AGENCY AGREEMENT
-------------------------------------------------------------
Total gross amount presented on the
Statements of Assets and Liabilities(1) $ 44,037
Non-cash Collateral(2) (44,037)
--------------
Net Amount $ --
==============
(1) The amount presented on the Statements of Assets and Liabilities, which is
included in "Investments, at value," is not offset and is shown on a gross
basis.
(2) At September 30, 2021, the value of the collateral received from each
borrower exceeded the value of the related securities loaned. This amount
is disclosed on the Portfolio of Investments.
The Fund's investments in repurchase agreements were all subject to an
enforceable Master Repurchase Agreement. Repurchase Agreements on a gross basis
were as follows:
REPURCHASE AGREEMENTS
-------------------------------------------------------------
Total gross amount presented on the
Statements of Assets and Liabilities(3) $ 23,029
Non-cash Collateral(4) (23,029)
--------------
Net Amount $ --
==============
(3) The amount is included in "Investments, at value" on the Statements of
Assets and Liabilities.
(4) At September 30, 2021, the value of the collateral received from each
seller exceeded the value of the repurchase agreements.
% OF TOTAL
CURRENCY EXPOSURE DIVERSIFICATION INVESTMENTS
-------------------------------------------------------------
Euro 47.7%
United States Dollar 21.4
Swedish Krona 14.1
British Pound Sterling 8.0
Danish Krone 3.8
Swiss Franc 3.2
Norwegian Krone 1.8
------
Total 100.0%
======
Page 12 See Notes to Financial Statements
FIRST TRUST DOW JONES INTERNATIONAL INTERNET ETF (FDNI)
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 2021
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
COMMON STOCKS (a) -- 96.4%
AUSTRALIA -- 1.9%
17,165 Afterpay Ltd. (b) (c) $ 1,491,213
23,999 SEEK Ltd. (b) 527,577
--------------
2,018,790
--------------
CANADA -- 10.0%
7,662 Shopify, Inc., Class A (c) 10,400,019
--------------
CAYMAN ISLANDS -- 47.5%
67,130 Alibaba Group Holding Ltd.,
ADR (c) 9,938,597
18,507 Baidu, Inc., ADR (c) 2,845,451
14,747 Bilibili, Inc., ADR (c) 975,809
21,171 Farfetch Ltd., Class A (c) 793,489
60,914 JD.com, Inc., ADR (c) 4,400,427
98,866 Kuaishou Technology
(b) (c) (d) (e) 1,055,167
273,267 Meituan, Class B (b) (c) (d) (e) 8,723,079
24,593 NetEase, Inc., ADR 2,100,242
13,663 Pagseguro Digital Ltd.,
Class A (c) 706,650
29,774 Pinduoduo, Inc., ADR (c) 2,699,609
14,670 Sea Ltd., ADR (c) 4,675,769
169,609 Tencent Holdings Ltd. (b) 10,125,447
25,249 Vipshop Holdings Ltd., ADR (c) 281,274
--------------
49,321,010
--------------
GERMANY -- 4.4%
12,857 Delivery Hero SE (b) (c) (d) (e) 1,639,971
11,801 HelloFresh SE (b) (c) 1,087,660
5,689 Scout24 AG (b) (d) (e) 394,033
10,236 TeamViewer AG (b) (c) (d) (e) 299,459
13,136 Zalando SE (b) (c) (d) (e) 1,198,020
--------------
4,619,143
--------------
ISLE OF MAN -- 1.1%
39,747 Entain PLC (b) (c) 1,135,239
--------------
ISRAEL -- 0.7%
3,829 Wix.com Ltd. (c) 750,369
--------------
JAPAN -- 4.2%
29,072 M3, Inc. (b) 2,071,913
31,382 Nexon Co., Ltd. (b) 503,698
62,173 Rakuten Group, Inc. (b) 605,612
176,676 Z Holdings Corp. (b) 1,130,737
--------------
4,311,960
--------------
LUXEMBOURG -- 2.0%
9,324 Spotify Technology S.A. (c) 2,101,070
--------------
NETHERLANDS -- 11.2%
1,592 Adyen N.V. (b) (c) (d) (e) 4,450,203
10,222 Just Eat Takeaway.com
N.V. (b) (c) (d) (e) 746,858
59,115 Prosus N.V. (b) 4,731,611
21,799 Yandex N.V., Class A (c) 1,737,162
--------------
11,665,834
--------------
NEW ZEALAND -- 0.8%
8,768 Xero Ltd. (b) (c) 860,392
--------------
SHARES DESCRIPTION VALUE
-------------------------------------------------------------
SOUTH AFRICA -- 2.4%
14,780 Naspers Ltd., Class N (b) $ 2,442,835
--------------
SOUTH KOREA -- 5.7%
21,093 Kakao Corp. 2,102,174
10,018 NAVER Corp. (b) 3,250,510
1,086 NCSoft Corp. (b) 550,117
--------------
5,902,801
--------------
UNITED KINGDOM -- 4.5%
9,183 Atlassian Corp. PLC, Class A (c) 3,594,410
65,772 Auto Trader Group PLC (b) (d) (e) 518,691
59,430 Rightmove PLC (b) 545,998
--------------
4,659,099
--------------
TOTAL INVESTMENTS -- 96.4% 100,188,561
(Cost $106,119,716) (f)
NET OTHER ASSETS AND
LIABILITIES -- 3.6% 3,714,181
--------------
NET ASSETS -- 100.0% $ 103,902,742
==============
(a) Portfolio securities are categorized based upon their country of
incorporation, which can be different from the country categorization of
the Fund's underlying index. For a breakdown of the portfolio securities
by sector, please see the Fund Performance Overview.
(b) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees, and
in accordance with provisions of the Investment Company Act of 1940, as
amended. At September 30, 2021, securities noted as such are valued at
$50,086,040 or 48.2% of net assets. Certain of these securities are fair
valued using a factor provided by a third-party pricing service due to the
change in value between the foreign markets' close and the New York Stock
Exchange close exceeding a certain threshold. On days when this threshold
is not exceeded, these securities are typically valued at the last sale
price on the exchange on which they are principally traded.
(c) Non-income producing security.
(d) This security is exempt from registration upon resale under Rule 144A of
the Securities Act of 1933, as amended (the "1933 Act") and may be resold
in transactions exempt from registration, normally to qualified
institutional buyers. This security is not restricted on the foreign
exchange where it trades freely without any additional registration. As
such, it does not require the additional disclosure required of restricted
securities.
(e) This security may be resold to qualified foreign investors and foreign
institutional buyers under Regulation S of the 1933 Act.
See Notes to Financial Statements Page 13
FIRST TRUST DOW JONES INTERNATIONAL INTERNET ETF (FDNI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2021
(f) Aggregate cost for federal income tax purposes is $108,393,241. As of
September 30, 2021, the aggregate gross unrealized appreciation for all
investments in which there was an excess of value over tax cost was
$11,185,748 and the aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost over value was
$19,390,428. The net unrealized depreciation was $8,204,680.
ADR - American Depositary Receipt
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of September 30,
2021 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
9/30/2021 PRICES INPUTS INPUTS
----------------------------------------------------
Common Stocks:
Canada $ 10,400,019 $10,400,019 $ -- $ --
Cayman
Islands 49,321,010 29,417,317 19,903,693 --
Israel 750,369 750,369 -- --
Luxembourg 2,101,070 2,101,070 -- --
Netherlands 11,665,834 1,737,162 9,928,672 --
South Korea 5,902,801 2,102,174 3,800,627 --
United
Kingdom 4,659,099 3,594,410 1,064,689 --
Other Country
Categories* 15,388,359 -- 15,388,359 --
----------------------------------------------------
Total
Investments $100,188,561 $50,102,521 $50,086,040 $ --
====================================================
* See Portfolio of Investments for country breakout.
% OF TOTAL
CURRENCY EXPOSURE DIVERSIFICATION INVESTMENTS
-------------------------------------------------------------
United States Dollar 37.5%
Hong Kong Dollar 19.9
Euro 14.5
Canadian Dollar 10.4
South Korean Won 5.9
Japanese Yen 4.3
Australian Dollar 2.9
South African Rand 2.4
British Pound Sterling 2.2
------
Total 100.0%
======
Page 14 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND II
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2021
FIRST TRUST FIRST TRUST
IPOX(R) EUROPE DOW JONES
EQUITY INTERNATIONAL
OPPORTUNITIES ETF INTERNET ETF
(FPXE) (FDNI)
---------------------- ----------------------
ASSETS:
Investments, at value ................................................. $ 10,729,070 $ 100,188,561
Cash .................................................................. 7,674 53,235
Foreign currency, at value ............................................ 55 --
Receivables:
Investment securities sold ......................................... -- 3,718,565
Reclaims ........................................................... 4,689 --
Dividends .......................................................... 1,278 2,402
Securities lending income .......................................... 33 --
---------------- ----------------
Total Assets ....................................................... 10,742,799 103,962,763
---------------- ----------------
LIABILITIES:
Payables:
Collateral for securities on loan .................................. 45,225 --
Investment advisory fees ........................................... 5,645 60,021
---------------- ----------------
Total Liabilities .................................................. 50,870 60,021
---------------- ----------------
NET ASSETS ............................................................ $ 10,691,929 $ 103,902,742
================ ================
NET ASSETS CONSIST OF:
Paid-in capital ....................................................... $ 10,390,775 $ 115,123,282
Par value ............................................................. 3,500 26,000
Accumulated distributable earnings (loss) ............................. 297,654 (11,246,540)
---------------- ----------------
NET ASSETS ............................................................ $ 10,691,929 $ 103,902,742
================ ================
NET ASSET VALUE, per share ............................................ $ 30.55 $ 39.96
================ ================
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share) ............................. 350,002 2,600,002
================ ================
Investments, at cost .................................................. $ 10,001,388 $ 106,119,716
================ ================
Foreign currency, at cost (proceeds) .................................. $ 55 $ --
================ ================
Securities on loan, at value .......................................... $ 44,037 $ --
================ ================
See Notes to Financial Statements Page 15
FIRST TRUST EXCHANGE-TRADED FUND II
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2021
FIRST TRUST FIRST TRUST
IPOX(R) EUROPE DOW JONES
EQUITY INTERNATIONAL
OPPORTUNITIES ETF INTERNET ETF
(FPXE) (FDNI)
---------------------- ----------------------
INVESTMENT INCOME:
Dividends.............................................................. $ 68,971 $ 119,104
Securities lending income (net of fees)................................ 3,715 --
Foreign withholding tax................................................ (9,717) (6,019)
---------------- ----------------
Total investment income 62,969 113,085
---------------- ----------------
EXPENSES:
Investment advisory fees............................................... 36,322 704,570
---------------- ----------------
Total expenses 36,322 704,570
---------------- ----------------
NET INVESTMENT INCOME (LOSS)........................................... 26,647 (591,485)
---------------- ----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (239,050) (4,846,921)
In-kind redemptions 287,410 9,329,366
Foreign currency transactions (692) (22,100)
---------------- ----------------
Net realized gain (loss)............................................... 47,668 4,460,345
---------------- ----------------
Net change in unrealized appreciation (depreciation) on:
Investments 182,279 (12,737,747)
Foreign currency translation (155) 88
---------------- ----------------
Net change in unrealized appreciation (depreciation)................... 182,124 (12,737,659)
---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 229,792 (8,277,314)
---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 256,439 $ (8,868,799)
================ ================
Page 16 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND II
STATEMENTS OF CHANGES IN NET ASSETS
FIRST TRUST FIRST TRUST
IPOX(R) EUROPE EQUITY DOW JONES INTERNATIONAL
OPPORTUNITIES ETF INTERNET ETF
(FPXE) (FDNI)
------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/2021 9/30/2020 9/30/2021 9/30/2020
------------- ------------- ------------- -------------
OPERATIONS:
Net investment income (loss)................................ $ 26,647 $ 14,604 $ (591,485) $ (68,610)
Net realized gain (loss).................................... 47,668 81,940 4,460,345 506,589
Net change in unrealized appreciation (depreciation)........ 182,124 373,968 (12,737,659) 6,929,710
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations.......................................... 256,439 470,512 (8,868,799) 7,367,689
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment operations....................................... (43,541) (23,081) (145,080) (61,741)
------------- ------------- ------------- -------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold................................... 9,415,730 1,085,057 93,036,318 39,002,716
Cost of shares redeemed..................................... (1,424,855) (1,010,545) (28,969,729) (1,662,339)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from shareholder transactions............................ 7,990,875 74,512 64,066,589 37,340,377
------------- ------------- ------------- -------------
Total increase (decrease) in net assets..................... 8,203,773 521,943 55,052,710 44,646,325
NET ASSETS:
Beginning of period......................................... 2,488,156 1,966,213 48,850,032 4,203,707
------------- ------------- ------------- -------------
End of period............................................... $ 10,691,929 $ 2,488,156 $ 103,902,742 $ 48,850,032
============= ============= ============= =============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period..................... 100,002 100,002 1,250,002 200,002
Shares sold................................................. 300,000 50,000 2,000,000 1,100,000
Shares redeemed............................................. (50,000) (50,000) (650,000) (50,000)
------------- ------------- ------------- -------------
Shares outstanding, end of period........................... 350,002 100,002 2,600,002 1,250,002
============= ============= ============= =============
See Notes to Financial Statements Page 17
FIRST TRUST EXCHANGE-TRADED FUND II
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST IPOX(R) EUROPE EQUITY OPPORTUNITIES ETF (FPXE)
YEAR ENDED SEPTEMBER 30,
-------------------------- PERIOD ENDED
2021 2020 9/30/2019 (a)
----------- ----------- -------------
Net asset value, beginning of period $ 24.88 $ 19.66 $ 19.70
--------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.25 0.22 0.33
Net realized and unrealized gain (loss) 5.75 5.30 (0.06)
--------- --------- -----------
Total from investment operations 6.00 5.52 0.27
--------- --------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.33) (0.30) (0.31)
--------- --------- -----------
Net asset value, end of period $ 30.55 $ 24.88 $ 19.66
========= ========= ===========
TOTAL RETURN (b) 24.19% 28.33% 1.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 10,692 $ 2,488 $ 1,966
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.70% 0.70% 0.70% (c)
Ratio of net investment income (loss) to
average net assets 0.51% 0.74% 1.77% (c)
Portfolio turnover rate (d) 118% 63% 67%
FIRST TRUST DOW JONES INTERNATIONAL INTERNET ETF (FDNI)
YEAR ENDED SEPTEMBER 30,
-------------------------- PERIOD ENDED
2021 2020 9/30/2019 (a)
----------- ----------- -------------
Net asset value, beginning of period $ 39.08 $ 21.02 $ 19.69
--------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.18) (0.03) 0.75
Net realized and unrealized gain (loss) 1.13 (e) 18.40 1.04
--------- --------- -----------
Total from investment operations 0.95 18.37 1.79
--------- --------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.07) (0.31) (0.46)
--------- --------- -----------
Net asset value, end of period $ 39.96 $ 39.08 $ 21.02
========= ========= ===========
TOTAL RETURN (b) 2.42% 88.27% 9.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 103,903 $ 48,850 $ 4,204
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.65% 0.65% 0.65% (c)
Ratio of net investment income (loss) to
average net assets (0.55)% (0.50)% 4.42% (c)
Portfolio turnover rate (d) 34% 23% 61%
(a) Inception dates for FPXE and FDNI are October 4, 2018 and November 5,
2018, respectively, which are consistent with the respective Fund's
commencement of investment operations and are the dates the initial
creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The 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.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
(e) The per share amount does not correlate with the aggregate realized and
unrealized gain (loss) due to the timing of the Fund share sales and
repurchases in relation to market value fluctuation of the underlying
investments.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
1. ORGANIZATION
First Trust Exchange-Traded Fund II (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on July 6, 2006,
and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of sixteen exchange-traded funds. This report
covers the two funds (each a "Fund" and collectively, the "Funds") listed below.
The shares of each Fund are listed and traded on The Nasdaq Stock Market LLC
("Nasdaq").
First Trust IPOX(R) Europe Equity Opportunities ETF - (ticker "FPXE")
First Trust Dow Jones International Internet ETF - (ticker "FDNI")
Each Fund represents a separate series of shares of beneficial interest in the
Trust. Unlike conventional mutual funds, each Fund issues and redeems shares on
a continuous basis, at net asset value ("NAV"), only in large blocks of shares
known as "Creation Units." The investment objective of each Fund is to seek
investment results that correspond generally to the price and yield (before the
Fund's fees and expenses) of the following indices:
FUND INDEX
First Trust IPOX(R) Europe Equity Opportunities ETF IPOX(R) 100 Europe Index
First Trust Dow Jones International Internet ETF Dow Jones International Internet Index
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds are each considered an investment company and follow accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Funds in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
Each Fund's NAV is determined daily as of the close of regular trading on the
New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day
the NYSE is open for trading. If the NYSE closes early on a valuation day, the
NAV is determined as of that time. Foreign securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
Each Fund's NAV is calculated by dividing the value of all assets of each Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
Each 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. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Funds'
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. Each Fund's investments are valued as
follows:
Common stocks and other equity securities listed on any national or
foreign exchange (excluding Nasdaq and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities trading on foreign exchanges or over-the-counter markets that
close prior to the NYSE close may be valued using a systematic fair
valuation model provided by a third-party pricing service. If these
foreign securities meet certain criteria in relation to the valuation
model, their valuation is systematically adjusted to reflect the impact of
movement in the U.S. market after the close of the foreign markets.
Shares of open-end funds are valued at fair value which is based on NAV
per share.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Overnight repurchase agreements are valued at amortized cost when it
represents the best estimate of fair value.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party 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 a Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund or exchange-traded fund trading of similar
securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
In addition, differences between the prices used to calculate a Fund's NAV and
the prices used by such Fund's corresponding index could result in a difference
between a Fund's performance and the performance of its underlying index.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of a Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE. Any use of a different rate from the rates
used by a relevant index may adversely affect the Fund's ability to track the
index.
The Funds are subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value each Fund's investments as of September 30, 2021, is
included with each Fund's Portfolio of Investments.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
Withholding taxes and tax reclaims on foreign dividends have been provided for
in accordance with each Fund's understanding of the applicable country's tax
rules and rates.
C. OFFSETTING ON THE STATEMENTS OF ASSETS AND LIABILITIES
Offsetting assets and liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statements of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a Fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
This disclosure, if applicable, is included within each Fund's Portfolio of
Investments under the heading "Offsetting Assets and Liabilities." For financial
reporting purposes, the Funds do not offset financial assets and financial
liabilities that are subject to master netting arrangements ("MNAs") or similar
agreements on the Statements of Assets and Liabilities. MNAs provide the right,
in the event of default (including bankruptcy and insolvency), for the
non-defaulting counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
D. FOREIGN CURRENCY
The books and records of the Funds are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statements of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statements of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are included in "Net
realized gain (loss) on foreign currency transactions" on the Statements of
Operations. The portion of foreign currency gains and losses related to
fluctuations in exchange rates between the initial purchase settlement date and
subsequent sale trade date is included in "Net realized gain (loss) on
investments" on the Statements of Operations.
E. SECURITIES LENDING
The Funds may lend securities representing up to 33 1/3% of the value of their
total assets to broker-dealers, banks and other institutions to generate
additional income. When a Fund loans its portfolio securities, it will receive,
at the inception of each loan, collateral equal to at least 102% (for domestic
securities) or 105% (for international securities) of the market value of the
loaned securities. The collateral amount is valued at the beginning of each
business day and is compared to the market value of the loaned securities from
the prior business day to determine if additional collateral is required. If
additional collateral is required, a request is sent to the borrower. Securities
lending involves the risk that the Fund may lose money because the borrower of
the Fund's loaned securities fails to return the securities in a timely manner
or at all. The Fund could also lose money in the event of (i) a decline in the
value of the collateral provided for the loaned securities, (ii) a decline in
the value of any investments made with cash collateral or (iii) an increase in
the value of the loaned securities if the borrower does not increase the
collateral accordingly and the borrower fails to return the securities. These
events could also trigger adverse tax consequences for the Funds.
Under the Funds' Securities Lending Agency Agreement, the securities lending
agent will generally bear the risk that a borrower may default on its obligation
to return loaned securities. Brown Brothers Harriman & Co. ("BBH") acts as each
Funds' securities lending agent and is responsible for executing the lending of
the portfolio securities to creditworthy borrower. The Funds, however, will be
responsible for the risks associated with the investment of cash collateral. A
Fund may lose money on its investment of cash collateral, which may affect its
ability to repay the collateral to the borrower without the use of other Fund
assets. Each Fund that engages in securities lending receives compensation (net
of any rebate and securities lending agent fees) for lending its securities.
Compensation can be in the form of fees received from the securities lending
agent or dividends or interest earned from the investment of cash collateral.
The fees received from the securities lending agent are accrued daily. The
dividend and interest earned on the securities loaned is accounted for in the
same manner as other dividend and interest income. At September 30, 2021, only
FPXE had securities in the securities lending program.
In the event of a default by a borrower with respect to any loan, BBH will
exercise any and all remedies provided under the applicable borrower agreement
to make the Funds whole. These remedies include purchasing replacement
securities by applying the collateral held from the defaulting broker against
the purchase cost of the replacement securities. If, despite such efforts by BBH
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
to exercise these remedies, a Fund sustains losses as a result of a borrower's
default, BBH will indemnify the Fund by purchasing replacement securities at its
own expense, or paying the Fund an amount equal to the market value of the
replacement securities, subject to certain limitations which are set forth in
detail in the Securities Lending Agency Agreement between the Trust on behalf of
the Funds and BBH.
F. REPURCHASE AGREEMENTS
Repurchase agreements involve the purchase of securities subject to the seller's
agreement to repurchase the securities at a mutually agreed upon date and price,
under the terms of a Master Repurchase Agreement ("MRA"). During the term of a
repurchase agreement, the value of the underlying securities held as collateral
on behalf of a Fund, including accrued interest, is required to exceed the value
of the repurchase agreement, including accrued interest. The underlying
securities for all repurchase agreements are held at the Funds' custodian or
designated sub-custodians under tri-party repurchase agreements.
MRAs govern transactions between a Fund and select counterparties. The MRAs
maintain provisions for, among other things, initiation, income payments, events
of default, and maintenance of collateral for repurchase agreements.
Repurchase agreements received for lending securities are collateralized by U.S.
Treasury securities. The U.S. Treasury securities are held in a joint custody
account at BBH on behalf of the Funds participating in the securities lending
program. In the event the counterparty defaults on the repurchase agreement, the
U.S. Treasury securities can either be maintained as part of a Fund's portfolio
or sold for cash. A Fund could suffer a loss to the extent that the proceeds
from the sale of the underlying collateral held by the Fund are less than the
repurchase price and the Fund's costs associated with the delay and enforcement
of the MRA.
While the Funds may invest in repurchase agreements, any repurchase agreements
held by the Funds during the fiscal year ended September 30, 2021, were received
as collateral for lending securities.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of each Fund, if any, are declared and paid
quarterly, or as the Board of Trustees may determine from time to time.
Distributions of net realized gains earned by each Fund, if any, are distributed
at least annually.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on significantly modified portfolio securities
held by the Funds and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some time in the future.
The tax character of distributions paid by each Fund during the fiscal year
ended September 30, 2021 was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
---------------- -------------- --------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 43,541 $ -- $ --
First Trust Dow Jones International Internet ETF 145,080 -- --
The tax character of distributions paid by each Fund during the fiscal year
ended September 30, 2020 was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
---------------- -------------- --------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 23,081 $ -- $ --
First Trust Dow Jones International Internet ETF 61,741 -- --
As of September 30, 2021, the components of distributable earnings on a tax
basis for each Fund were as follows:
Accumulated Net
Undistributed Capital and Unrealized
Ordinary Other Appreciation
Income Gain (Loss) (Depreciation)
---------------- -------------- --------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 10,268 $ (354,453) $ 641,839
First Trust Dow Jones International Internet ETF (726,839) (2,315,094) (8,204,607)
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
H. INCOME TAXES
Each Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, each Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of each Fund's taxable income
exceeds the distributions from such taxable income for the calendar year.
The Funds are subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2019, 2020,
and 2021 remain open to federal and state audit. As of September 30, 2021,
management has evaluated the application of these standards to the Funds, and
has determined that no provision for income tax is required in the Funds'
financial statements for uncertain tax positions.
Each Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
Each Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At September 30, 2021, for
federal income tax purposes, each applicable Fund had a capital loss
carryforward available that is shown in the table below, to the extent provided
by regulations, to offset future capital gains. To the extent that these loss
carryforwards are used to offset future capital gains, it is probable that the
capital gains so offset will not be distributed to each applicable Fund's
shareholders.
Non-Expiring
Capital Loss
Carryforwards
---------------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 354,453
First Trust Dow Jones International Internet ETF 2,315,094
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended September 30, 2021, the following
Fund incurred and elected to defer late year ordinary or capital losses as
follows:
Qualified Late Year Losses
-------------------------------------
Ordinary Losses Capital Losses
--------------- --------------
First Trust Dow Jones International Internet ETF $ 726,839 $ --
In order to present paid-in capital and accumulated distributable earnings
(loss) (which consists of accumulated net investment income (loss), accumulated
net realized gain (loss) on investments and net unrealized appreciation
(depreciation) on investments) on the Statements of Assets and Liabilities that
more closely represent their tax character, certain adjustments have been made
to paid-in capital, accumulated net investment income (loss) and accumulated net
realized gain (loss) on investments. These adjustments are primarily due to the
difference between book and tax treatments of income and gains on various
investment securities held by the Funds and in-kind transactions. The results of
operations and net assets were not affected by these adjustments. For the fiscal
year ended September 30, 2021, the adjustments for each Fund were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss) Paid-in
Income (Loss) on Investments Capital
---------------- -------------- --------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 7,562 $ (245,051) $ 237,489
First Trust Dow Jones International Internet ETF 87,051 (8,684,558) 8,597,507
I. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3). First Trust has entered into licensing
agreements with each of the following "Licensors" for the respective Funds:
FUND LICENSOR
First Trust IPOX(R) Europe Equity Opportunities ETF IPOX(R) Schuster LLC
First Trust Dow Jones International Internet ETF S&P Dow Jones Indices LLC
The respective license agreements allow for the use of each Fund's respective
index and of certain trademarks and trade names of the respective Licensors. The
Funds are sub-licensees to the applicable license agreements. The Funds'
licensing fees are paid by First Trust from the unitary investment advisory fees
it receives from each of the Funds.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Funds, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in each Fund's portfolio, managing the Funds' business affairs and providing
certain administrative services necessary for the management of the Funds.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Funds' assets and is
responsible for the expenses of each Fund including the cost of transfer agency,
custody, fund administration, legal, audit and other services and license fees
(if any), but excluding fee payments under the Investment Management Agreement,
interest, taxes, acquired fund fees and expenses, brokerage commissions and
other expenses connected with the execution of portfolio transactions,
distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses, which are paid by each respective Fund. FPXE and FDNI
have each agreed to pay First Trust an annual unitary management fee equal to
0.70% and 0.65% of its average daily net assets, respectively.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
each Fund. As custodian, BNYM is responsible for custody of each Fund's assets.
As fund accountant and administrator, BNYM is responsible for maintaining the
books and records of each Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for each Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
a defined-outcome fund or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended September 30, 2021, the cost of purchases and proceeds
from sales of investments for each Fund, excluding short-term investments and
in-kind transactions, were as follows:
Purchases Sales
---------------- --------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 6,154,783 $ 6,165,621
First Trust Dow Jones International Internet ETF 50,790,565 35,281,992
For the fiscal year ended September 30, 2021, the cost of in-kind purchases and
proceeds from in-kind sales for each Fund were as follows:
Purchases Sales
---------------- --------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 9,400,300 $ 1,418,587
First Trust Dow Jones International Internet ETF 71,693,483 27,046,554
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Each Fund generally issues and redeems its shares in primary market transactions
through a creation and redemption mechanism and does not sell or redeem
individual shares. Instead, financial entities known as "Authorized
Participants" have contractual arrangements with a Fund or one of the Fund's
service providers to purchase and redeem Fund shares directly with the Fund in
large blocks of shares known as "Creation Units." Prior to the start of trading
on every business day, a Fund publishes through the National Securities Clearing
Corporation ("NSCC") the "basket" of securities, cash or other assets that it
will accept in exchange for a Creation Unit of the Fund's shares. An Authorized
Participant that wishes to effectuate a creation of a Fund's shares deposits
with the Fund the "basket" of securities, cash or other assets identified by the
Fund that day, and then receives the Creation Unit of the Fund's shares in
return for those assets. After purchasing a Creation Unit, the Authorized
Participant may continue to hold the Fund's shares or sell them in the secondary
market. The redemption process is the reverse of the purchase process: the
Authorized Participant redeems a Creation Unit of a Fund's shares for a basket
of securities, cash or other assets. The combination of the creation and
redemption process with secondary market trading in a Fund's shares and
underlying securities provides arbitrage opportunities that are designed to help
keep the market price of a Fund's shares at or close to the NAV per share of the
Fund.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021
Each Fund imposes fees in connection with the purchase of Creation Units. These
fees may vary based upon various fact-based circumstances, including, but not
limited to, the composition of the securities included in the Creation Unit or
the countries in which the transactions are settled. The price for each Creation
Unit will equal the daily NAV per share of a Fund times the number of shares in
a Creation Unit, plus the fees described above and, if applicable, any
operational processing and brokerage costs, transfer fees, stamp taxes and part
or all of the spread between the expected bid and offer side of the market
related to the securities comprising the creation basket.
Each Fund also imposes fees in connection with the redemption of Creation Units.
These fees may vary based upon various fact-based circumstances, including, but
not limited to, the composition of the securities included in the Creation Unit
or the countries in which the transactions are settled. The price received for
each Creation Unit will equal the daily NAV per share of a Fund times the number
of shares in a Creation Unit, minus the fees described above and, if applicable,
any operational processing and brokerage costs, transfer fees, stamp taxes and
part or all of the spread between the expected bid and offer side of the market
related to the securities comprising the redemption basket. Investors who use
the services of a broker or other such intermediary in addition to an Authorized
Participant to effect a redemption of a Creation Unit may also be assessed an
amount to cover the cost of such services. The redemption fee charged by a Fund
will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no
more than 2% of the value of the shares redeemed.
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are
authorized to pay an amount up to 0.25% of their average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Funds, 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
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before January 31, 2023.
7. INDEMNIFICATION
The Trust, on behalf of the Funds, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Funds
through the date the financial statements were issued, and has determined that
there were no subsequent events requiring recognition or disclosure in the
financial statements that have not already been disclosed.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF FIRST TRUST EXCHANGE-TRADED FUND
II:
OPINION ON THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS
We have audited the accompanying statements of assets and liabilities of First
Trust IPOX(R) Europe Equity Opportunities ETF and First Trust Dow Jones
International Internet ETF (the "Funds"), each a series of the First Trust
Exchange-Traded Fund II, including the portfolios of investments, as of
September 30, 2021, and the related statements of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for the periods listed in the
table below, and the related notes. In our opinion, the financial statements and
financial highlights present fairly, in all material respects, the financial
position of the Funds as of September 30, 2021, and the results of their
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
the periods listed in the table below, in conformity with accounting principles
generally accepted in the United States of America.
----------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL FUNDS INCLUDED
IN THE TRUST FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------------
First Trust IPOX(R) Europe Equity For the years ended September 30, 2021 and 2020, and for the period from October 4,
Opportunities ETF 2018 (commencement of operations) through September 30, 2019
----------------------------------------------------------------------------------------------------------------------------
First Trust Dow Jones International For the years ended September 30, 2021 and 2020, and for the period from November 5,
Internet ETF 2018 (commencement of operations) through September 30, 2019
----------------------------------------------------------------------------------------------------------------------------
BASIS FOR OPINION
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on the Funds'
financial statements and financial highlights based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to
the Funds in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement, whether due to error or fraud. The Funds are not
required to have, nor were we engaged to perform, an audit of their internal
control over financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Funds' internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements and financial highlights, whether due
to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements and financial highlights. Our audits
also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2021, by correspondence
with the custodian and brokers. We believe that our audits provide a reasonable
basis for our opinion.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 22, 2021
We have served as the auditor of one or more First Trust investment companies
since 2001.
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ADDITIONAL INFORMATION
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how each Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
each Fund's website at www.ftportfolios.com; and (3) on the Securities and
Exchange Commission's ("SEC") website at www.sec.gov.
PORTFOLIO HOLDINGS
Each Fund files portfolio holdings information for each month in a fiscal
quarter within 60 days after the end of the relevant fiscal quarter on Form
N-PORT. Portfolio holdings information for the third month of each fiscal
quarter will be publicly available on the SEC's website at www.sec.gov. Each
Fund's complete schedule of portfolio holdings for the second and fourth
quarters of each fiscal year is included in the semi-annual and annual reports
to shareholders, respectively, and is filed with the SEC on Form N-CSR. The
semi-annual and annual report for each Fund is available to investors within 60
days after the period to which it relates. Each Fund's Forms N-PORT and Forms
N-CSR are available on the SEC's website listed above.
FEDERAL TAX INFORMATION
For the taxable year ended September 30, 2021, the following percentages of
income dividend paid by the Funds qualify for the dividends received deduction
available to corporations:
Dividends Received Deduction
----------------------------
First Trust IPOX(R) Europe Equity Opportunities ETF 0.00%
First Trust Dow Jones International Internet ETF 0.00%
For the taxable year ended September 30, 2021, the following percentages of
income dividend paid by the Funds are hereby designated as qualified dividend
income:
Qualified Dividend Income
----------------------------
First Trust IPOX(R) Europe Equity Opportunities ETF 83.43%
First Trust Dow Jones International Internet ETF 31.17%
A portion of each of the Funds' 2021 ordinary dividends (including short-term
capital gains) paid to its shareholders during the fiscal year ended September
30, 2021, may be eligible for the Qualified Business Income Deduction (QBI)
under the Internal Revenue Code of 1986, as amended (the "Code"), Section 199A
for the aggregate dividends each Fund received from the underlying Real Estate
Investment Trusts (REITs) these Funds invest in.
The following Funds meet the requirements of Section 853 of the Code and elect
to pass through to their shareholders credit for foreign taxes paid. For the
taxable year ended September 30, 2021, the total amounts of income received by
the Funds from sources within foreign countries and possessions of the United
States and of taxes paid to such countries are as follows:
Gross Foreign Income Foreign Taxes Paid
--------------------------- ---------------------------
Amount Per Share Amount Per Share
------------- ------------ ------------- ------------
First Trust IPOX(R) Europe Equity Opportunities ETF $ 68,922 $ 0.20 $ 8,117 $ 0.02
First Trust Dow Jones International Internet ETF 119,104 0.05 6,019 0.00
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. CERTAIN GENERAL RISKS THAT MAY BE
APPLICABLE TO A FUND ARE IDENTIFIED BELOW, BUT NOT ALL OF THE MATERIAL RISKS
RELEVANT TO EACH FUND ARE INCLUDED IN THIS REPORT AND NOT ALL OF THE RISKS BELOW
APPLY TO EACH FUND. THE MATERIAL RISKS OF INVESTING IN EACH FUND ARE SPELLED OUT
IN ITS PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND OTHER REGULATORY
FILINGS. BEFORE INVESTING, YOU SHOULD CONSIDER EACH FUND'S INVESTMENT OBJECTIVE,
RISKS, CHARGES AND EXPENSES, AND READ EACH FUND'S PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION CAREFULLY. YOU CAN DOWNLOAD EACH FUND'S PROSPECTUS AT
WWW.FTPORTFOLIOS.COM OR CONTACT FIRST TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO
REQUEST A PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION ABOUT EACH FUND.
CONCENTRATION RISK. To the extent that a fund is able to invest a significant
percentage of its assets in a single asset class or the securities of issuers
within the same country, state, region, industry or sector, an adverse economic,
business or political development may affect the value of the fund's investments
more than if the fund were more broadly diversified. A fund that tracks an index
will be concentrated to the extent the fund's corresponding index is
concentrated. A concentration makes a fund more susceptible to any single
occurrence and may subject the fund to greater market risk than a fund that is
more broadly diversified.
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
CYBER SECURITY RISK. The funds are susceptible to potential operational risks
through breaches in cyber security. A breach in cyber security refers to both
intentional and unintentional events that may cause a fund to lose proprietary
information, suffer data corruption or lose operational capacity. Such events
could cause a fund to incur regulatory penalties, reputational damage,
additional compliance costs associated with corrective measures and/or financial
loss. In addition, cyber security breaches of a fund's third-party service
providers, such as its administrator, transfer agent, custodian, or sub-advisor,
as applicable, or issuers in which the fund invests, can also subject a fund to
many of the same risks associated with direct cyber security breaches.
DEFINED OUTCOME FUNDS RISK. To the extent a fund's investment strategy is
designed to deliver returns tied to the price performance of an underlying ETF,
an investor may not realize the returns the fund seeks to achieve if that
investor does not hold shares for the entire target outcome period. In the event
an investor purchases shares after the first day of the target outcome period or
sells shares prior to the end of the target outcome period, the buffer that the
fund seeks to provide against a decline in the value of the underlying ETF may
not be available, the enhanced returns that the fund seeks to provide (if any)
may not be available and the investor may not participate in a gain in the value
of the underlying ETF up to the cap for the investor's investment period.
Additionally, the fund will not participate in gains of the underlying ETF above
the cap and a shareholder may lose their entire investment. If the fund seeks
enhanced returns, there are certain time periods when the value of the fund may
fall faster than the value of the underlying ETF, and it is very unlikely that,
on any given day during which the underlying ETF share price increases in value,
the fund's share price will increase at the same rate as the enhanced returns
sought by the fund, which is designed for an entire target outcome period.
Trading flexible exchange options involves risks different from, or possibly
greater than, the risks associated with investing directly in securities, such
as less liquidity and correlation and valuation risks. A fund may experience
substantial downside from specific flexible exchange option positions and
certain positions may expire worthless.
DERIVATIVES RISK. To the extent a fund uses derivative instruments such as
futures contracts, options contracts and swaps, the fund may experience losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivative.
These risks are heightened when a fund's portfolio managers use derivatives to
enhance the fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
fund.
EQUITY SECURITIES RISK. To the extent a fund invests in equity securities, the
value of the fund's shares will fluctuate with changes in the value of the
equity securities. 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 stock market, such as market
volatility, or when political or economic events affecting the issuers occur. In
addition, 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.
ETF RISK. The shares of an ETF trade like common stock and represent an interest
in a portfolio of securities. The risks of owning an ETF generally reflect the
risks of owning the underlying securities, although lack of liquidity in an ETF
could result in it being more volatile and ETFs have management fees that
increase their costs. Shares of an ETF trade on an exchange at market prices
rather than net asset value, which may cause the shares to trade at a price
greater than net asset value (premium) or less than net asset value (discount).
In times of market stress, decisions by market makers to reduce or step away
from their role of providing a market for an ETF's shares, or decisions by an
ETF's authorized participants that they are unable or unwilling to proceed with
creation and/or redemption orders of an ETF's shares, could result in shares of
the ETF trading at a discount to net asset value and in greater than normal
intraday bid-ask spreads.
FIXED INCOME SECURITIES RISK. To the extent a fund invests in fixed income
securities, the fund will be subject to credit risk, income risk, interest rate
risk, liquidity risk and prepayment risk. Income risk is the risk that income
from a fund's fixed income investments could decline during periods of falling
interest rates. Interest rate risk is the risk that the value of a fund's fixed
income securities will decline because of rising interest rates. Liquidity risk
is the risk that a security cannot be purchased or sold at the time desired, or
cannot be purchased or sold without adversely affecting the price. Prepayment
risk is the risk that the securities will be redeemed or prepaid by the issuer,
resulting in lower interest payments received by the fund. In addition to these
risks, high yield securities, or "junk" bonds, are subject to greater market
fluctuations and risk of loss than securities with higher ratings, and the
market for high yield securities is generally smaller and less liquid than that
for investment grade securities.
INDEX OR MODEL CONSTITUENT RISK. Certain funds may be a constituent of one or
more indices or ETF models. As a result, such a fund may be included in one or
more index-tracking exchange-traded funds or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving a
fund, the size of the fund and the market volatility of the fund. Inclusion in
an index could increase demand for the fund and removal from an index could
result in outsized selling activity in a relatively short period of time. As a
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
result, a fund's net asset value could be negatively impacted and the fund's
market price may be significantly below its net asset value during certain
periods. In addition, index rebalances may potentially result in increased
trading activity in a fund's shares.
INDEX PROVIDER RISK. To the extent a fund seeks to track an index, it is subject
to Index Provider Risk. There is no assurance that the Index Provider will
compile the Index accurately, or that the Index will be determined, maintained,
constructed, reconstituted, rebalanced, composed, calculated or disseminated
accurately. To correct any such error, the Index Provider may carry out an
unscheduled rebalance or other modification of the Index constituents or
weightings, which may increase the fund's costs. The Index Provider does not
provide any representation or warranty in relation to the quality, accuracy or
completeness of data in the Index, and it does not guarantee that the Index will
be calculated in accordance with its stated methodology. Losses or costs
associated with any Index Provider errors generally will be borne by the fund
and its shareholders.
INVESTMENT COMPANIES RISK. To the extent a fund invests in the securities of
other investment vehicles, the fund will incur additional fees and expenses that
would not be present in a direct investment in those investment vehicles.
Furthermore, the fund's investment performance and risks are directly related to
the investment performance and risks of the investment vehicles in which the
fund invests.
LIBOR RISK. To the extent a fund invests in floating or variable rate
obligations that use the London Interbank Offered Rate ("LIBOR") as a reference
interest rate, it is subject to LIBOR Risk. The United Kingdom's Financial
Conduct Authority, which regulates LIBOR, will cease making LIBOR available as a
reference rate over a phase-out period that will begin immediately after
December 31, 2021. The unavailability or replacement of LIBOR may affect the
value, liquidity or return on certain fund investments and may result in costs
incurred in connection with closing out positions and entering into new trades.
Any potential effects of the transition away from LIBOR on the fund or on
certain instruments in which the fund invests can be difficult to ascertain, and
they may vary depending on a variety of factors, and they could result in losses
to the fund.
MANAGEMENT RISK. To the extent that a fund is actively managed, it is subject to
management risk. In managing an actively-managed fund's investment portfolio,
the fund's portfolio managers will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that a fund will
meet its investment objective.
MARKET RISK. Securities held by a fund, as well as shares of a fund itself, are
subject to market fluctuations caused by factors such as general economic
conditions, political events, regulatory or market developments, changes in
interest rates and perceived trends in securities prices. Shares of a fund could
decline in value or underperform other investments as a result of the risk of
loss associated with these market fluctuations. 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 a fund and its investments. Such events may affect certain
geographic regions, countries, sectors and industries more significantly than
others. The outbreak of the respiratory disease designated as COVID-19 in
December 2019 has caused significant volatility and declines in global financial
markets, which have caused losses for investors. While the development of
vaccines has slowed the spread of the virus and allowed for the resumption of
"reasonably" normal business activity in the United States, many countries
continue to impose lockdown measures in an attempt to slow the spread.
Additionally, there is no guarantee that vaccines will be effective against
emerging variants of the disease.
NON-U.S. SECURITIES RISK. To the extent a fund invests in non-U.S. securities,
it is subject to additional risks not associated with securities of domestic
issuers. Non-U.S. securities are subject to higher volatility than securities of
domestic issuers due to: possible adverse political, social or economic
developments; restrictions on foreign investment or exchange of securities; lack
of liquidity; currency exchange rates; excessive taxation; government seizure of
assets; the imposition of sanctions by foreign governments; different legal or
accounting standards; and less government supervision and regulation of
exchanges in foreign countries. Investments in non-U.S. securities may involve
higher costs than investments in U.S. securities, including higher transaction
and custody costs, as well as additional taxes imposed by non-U.S. governments.
These risks may be heightened for securities of companies located, or with
significant operations, in emerging market countries.
OPERATIONAL RISK. Each fund is subject to risks arising from various operational
factors, including, but not limited to, human error, processing and
communication errors, errors of a fund's service providers, counterparties or
other third-parties, failed or inadequate processes and technology or systems
failures. Each 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 a fund's ability to meet its investment objective. Although
the funds and the funds' investment advisor seek to reduce these operational
risks through controls and procedures, there is no way to completely protect
against such risks.
PASSIVE INVESTMENT RISK. To the extent a fund seeks to track an index, the fund
will invest in the securities included in, or representative of, the index
regardless of their investment merit. A fund generally will not attempt to take
defensive positions in declining markets.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
VARIABLE INTEREST ENTITIES RISK. In order to gain exposure to certain Chinese
companies that are included in a Fund's Index but are unavailable to direct
investment by foreign investors, certain Funds invest significantly in
non-Chinese shell companies that have created structures known as variable
interest entities ("VIEs") in order to gain exposure to such Chinese companies.
In China, direct ownership of companies in certain sectors by foreign
individuals and entities is prohibited. In order to allow for foreign investment
in these businesses, many Chinese companies have created VIE structures to
enable indirect foreign ownership. In such an arrangement, a Chinese operating
company typically establishes an offshore shell company in another jurisdiction,
such as the Cayman Islands. That shell company enters into service and other
contracts with the Chinese issuer or operating company to obtain economic
exposure to the Chinese company, then issues shares on an exchange outside of
mainland China, and U.S. investors hold stock in the non-Chinese shell company
rather than directly in the Chinese issuer or operating company. This
arrangement allows U.S. investors, such as the Fund, to obtain economic exposure
to the Chinese issuer or operating company through contractual means rather than
through formal equity ownership. Because neither the shell company nor the Fund
owns actual equity interests in the Chinese operating company, they do not have
the voting rights or other types of control that an equity holder would expect
to benefit from. Although VIEs are a longstanding industry practice and well
known to officials and regulators in China, VIEs are not formally recognized
under Chinese law. Intervention by the Chinese government with respect to VIEs
could significantly affect the Chinese company's performance and the
enforceability of the VIE's contractual arrangements that establish the links
between the Chinese company and the shell company in which the Fund invests.
This could considerably impact the financial condition of the shell company in
which the Fund invests by limiting its ability to consolidate the financial
results of the Chinese operating company into its own financial statements, as
well as make the value of the shares held by the Fund effectively worthless.
Further, if Chinese officials prohibit the existence of VIEs, the market value
of the Fund's associated holdings would likely suffer significant, and possibly
permanent effects, which could negatively impact the Fund's net asset value and
could result in substantial losses. Further, it is uncertain whether any new
laws, rules or regulations relating to VIE structures will be adopted or, if
adopted, what impact they would have on the value of the Fund's shares. VIEs are
also subject to the investment risks associated with the underlying Chinese
issuer or operating company. Chinese companies are not subject to the same
degree of regulatory requirements or accounting standards and oversight as
companies in more developed countries. As a result, information about the
Chinese securities and VIEs in which the Fund invests may be less reliable and
incomplete. There also may be significant obstacles to obtaining information
necessary for investigations into or litigation against Chinese companies and
VIEs, and shareholders may have limited legal remedies, which could negatively
impact the Fund. Additionally, U.S.-listed VIEs may be delisted if they do not
meet U.S. accounting standards and auditor oversight requirements. Delisting
would significantly decrease the liquidity and value of the securities, decrease
the ability of the Fund to invest in such securities and may increase the cost
of the Fund if required to seek alternative markets in which to invest in such
securities.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENTS
The Board of Trustees of First Trust Exchange-Traded Fund II (the "Trust"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreements (as applicable to a specific Fund, the
"Agreement" and collectively, the "Agreements") with First Trust Advisors L.P.
(the "Advisor") on behalf of the following two series of the Trust (each a
"Fund" and collectively, the "Funds"):
First Trust IPOX(R) Europe Equity Opportunities ETF (FPXE)
First Trust Dow Jones International Internet ETF (FDNI)
The Board approved the continuation of the Agreement for each Fund for a
one-year period ending June 30, 2022 at a meeting held on June 6-7, 2021. The
Board determined for each Fund that the continuation of the Agreement is in the
best interests of the Fund in light of the nature, extent and quality of the
services provided and such other matters as the Board considered to be relevant
in the exercise of its business judgment.
To reach this determination for each Fund, the Board considered its duties under
the Investment Company Act of 1940, as amended (the "1940 Act"), as well as
under the general principles of state law, in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 26, 2021 and June 6-7, 2021, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Trustees, submitted on behalf of the Independent Trustees, that, among other
things, outlined: the services provided by the Advisor to each Fund (including
the relevant personnel responsible for these services and their experience); the
unitary fee rate payable by each Fund as compared to fees charged to a peer
group of funds (the "Expense Group") and a broad peer universe of funds (the
"Expense Universe"), each assembled by Broadridge Financial Solutions, Inc.
("Broadridge"), an independent source, and as compared to fees charged to other
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
clients of the Advisor, including other exchange-traded funds ("ETFs") managed
by the Advisor; the expense ratio of each Fund as compared to expense ratios of
the funds in the Fund's Expense Group and Expense Universe; performance
information for each Fund, including comparisons of each Fund's performance to
that of one or more relevant benchmark indexes and to that of a performance
group of funds and a broad performance universe of funds (the "Performance
Universe"), each assembled by Broadridge; the nature of expenses incurred in
providing services to each Fund and the potential for the Advisor to realize
economies of scale, if any; profitability and other financial data for the
Advisor; any fall-out benefits to the Advisor and its affiliate, First Trust
Portfolios L.P. ("FTP"); and information on the Advisor's compliance program.
The Board reviewed initial materials with the Advisor at the meeting held on
April 26, 2021, prior to which the Independent Trustees and their counsel met
separately to discuss the information provided by the Advisor. Following the
April meeting, counsel to the Independent Trustees, on behalf of the Independent
Trustees, requested certain clarifications and supplements to the materials
provided, and the information provided in response to those requests was
considered at an executive session of the Independent Trustees and their counsel
held prior to the June 6-7, 2021 meeting, as well as at the June meeting. The
Board applied its business judgment to determine whether the arrangement between
the Trust and the Advisor continues to be a reasonable business arrangement from
each Fund's perspective. The Board determined that, given the totality of the
information provided with respect to the Agreements, the Board had received
sufficient information to renew the Agreements. The Board considered that
shareholders chose to invest or remain invested in a Fund knowing that the
Advisor manages the Fund and knowing the Fund's unitary fee.
In reviewing the Agreement for each Fund, the Board considered the nature,
extent and quality of the services provided by the Advisor under the Agreement.
The Board considered that the Advisor is responsible for the overall management
and administration of the Trust and each Fund and reviewed all of the services
provided by the Advisor to the Funds, as well as the background and experience
of the persons responsible for such services. In reviewing the services
provided, the Board noted the compliance program that had been developed by the
Advisor and considered that it includes a robust program for monitoring the
Advisor's and each Fund's compliance with the 1940 Act, as well as each Fund's
compliance with its investment objective, policies and restrictions. The Board
also considered a report from the Advisor with respect to its risk management
functions related to the operation of the Funds. Finally, as part of the Board's
consideration of the Advisor's services, the Advisor, in its written materials
and at the April 26, 2021 meeting, described to the Board the scope of its
ongoing investment in additional personnel and infrastructure to maintain and
improve the quality of services provided to the Funds and the other funds in the
First Trust Fund Complex. In light of the information presented and the
considerations made, the Board concluded that the nature, extent and quality of
the services provided to the Trust and each Fund by the Advisor under the
Agreements have been and are expected to remain satisfactory and that the
Advisor has managed each Fund consistent with its investment objective, policies
and restrictions.
The Board considered the unitary fee rate payable by each Fund under the
applicable Agreement for the services provided. The Board considered that as
part of the unitary fee the Advisor is responsible for each Fund's expenses,
including the cost of transfer agency, custody, fund administration, legal,
audit and other services and license fees, if any, but excluding the fee payment
under the applicable Agreement and interest, taxes, brokerage commissions and
other expenses connected with the execution of portfolio transactions,
distribution and service fees pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses, if any. The Board received and reviewed information
showing the advisory or unitary fee rates and expense ratios of the peer funds
in the Expense Groups, as well as advisory and unitary fee rates charged by the
Advisor to other fund (including ETFs) and non-fund clients, as applicable.
Because each Fund pays a unitary fee, the Board determined that expense ratios
were the most relevant comparative data point. Based on the information
provided, the Board noted that the unitary fee rate for each Fund was above the
median total (net) expense ratio of the peer funds in its respective Expense
Group. With respect to the Expense Groups, the Board, at the April 26, 2021
meeting, discussed with the Advisor limitations in creating peer groups for
index ETFs, including differences in underlying indexes and index-tracking
methodologies that can result in greater management complexities across
seemingly comparable ETFs, and different business models that may affect the
pricing of services among ETF sponsors. The Board took these limitations and
differences into account in considering the peer data. With respect to fees
charged to other non-ETF clients, the Board considered differences between the
Funds and other non-ETF clients that limited their comparability. In considering
the unitary fee rates overall, the Board also considered the Advisor's statement
that it seeks to meet investor needs through innovative and value-added
investment solutions and the Advisor's demonstrated long-term commitment to each
Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for each Fund. The Board noted the
process it has established for monitoring each Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor for the Funds. The Board determined that this process continues to
be effective for reviewing each Fund's performance. The Board received and
reviewed information for periods ended December 31, 2020 regarding the
performance of each Fund's underlying index, the correlation between each Fund's
performance and that of its underlying index, each Fund's tracking difference
and each Fund's excess return as compared to its benchmark index. Based on the
information provided and its ongoing review of performance, the Board concluded
that each Fund was correlated to its underlying index and that the tracking
difference for each Fund was within a reasonable range. In addition, the Board
reviewed data prepared by Broadridge comparing each Fund's performance to that
of its respective Performance Universe and to that of a broad-based benchmark
index, but given each Fund's objective of seeking investment results that
correspond generally to the performance of its underlying index, the Board
placed more emphasis on its review of correlation and tracking difference.
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
On the basis of all the information provided on the unitary fee and performance
of each Fund and the ongoing oversight by the Board, the Board concluded that
the unitary fee for each Fund continues to be reasonable and appropriate in
light of the nature, extent and quality of the services provided by the Advisor
to each Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Funds and noted the Advisor's statement that it believes its expenses will
likely increase during the next twelve months as the Advisor continues to hire
personnel and build infrastructure, including technology, to improve the
services to the Funds. The Board noted that any reduction in fixed costs
associated with the management of the Funds would benefit the Advisor, but that
the unitary fee structure provides a level of certainty in expenses for the
Funds. The Board considered the revenues and allocated costs (including the
allocation methodology) of the Advisor in serving as investment advisor to each
Fund for the twelve months ended December 31, 2020 and the estimated
profitability level for each Fund calculated by the Advisor based on such data,
as well as complex-wide and product-line profitability data, for the same
period. The Board noted the inherent limitations in the profitability analysis
and concluded that, based on the information provided, the Advisor's
profitability level for each Fund was not unreasonable. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Funds. The Board considered that the Advisor had
identified as a fall-out benefit to the Advisor and FTP their exposure to
investors and brokers who, absent their exposure to the Funds, may have had no
dealings with the Advisor or FTP, and noted that the Advisor does not utilize
soft dollars in connection with the Funds. The Board concluded that the
character and amount of potential fall-out benefits to the Advisor were not
unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of each Fund. No single factor was
determinative in the Board's analysis.
LIQUIDITY RISK MANAGEMENT PROGRAM
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as
amended (the "1940 Act"), the Funds and each other fund in the First Trust Fund
Complex, other than the closed-end funds, have adopted and implemented a
liquidity risk management program (the "Program") reasonably designed to assess
and manage the funds' liquidity risk, i.e., the risk that a fund could not meet
requests to redeem shares issued by the fund without significant dilution of
remaining investors' interests in the fund. The Board of Trustees of the First
Trust Funds has appointed First Trust Advisors, L.P. (the "Advisor") as the
person designated to administer the Program, and in this capacity the Advisor
performs its duties primarily through the activities and efforts of the First
Trust Liquidity Committee (the "Liquidity Committee").
Pursuant to the Program, the Liquidity Committee classifies the liquidity of
each fund's portfolio investments into one of the four liquidity categories
specified by Rule 22e-4: highly liquid investments, moderately liquid
investments, less liquid investments and illiquid investments. The Liquidity
Committee determines certain of the inputs for this classification process,
including reasonably anticipated trade sizes and significant investor dilution
thresholds. The Liquidity Committee also determines and periodically reviews a
highly liquid investment minimum for certain funds, monitors the funds' holdings
of assets classified as illiquid investments to seek to ensure they do not
exceed 15% of a fund's net assets and establishes policies and procedures
regarding redemptions in kind.
At the April 26, 2021 meeting of the Board of Trustees, as required by Rule
22e-4 and the Program, the Advisor provided the Board with a written report
prepared by the Advisor that addressed the operation of the Program during the
period from March 20, 2020 through the Liquidity Committee's annual meeting held
on March 16, 2021 and assessed the Program's adequacy and effectiveness of
implementation during this period, including the operation of the highly liquid
investment minimum for each fund that is required under the Program to have one,
and any material changes to the Program. Note that because the Funds primarily
hold assets that are highly liquid investments, the Funds have not adopted any
highly liquid investment minimums.
As stated in the written report, during the review period, no fund breached the
15% limitation on illiquid investments, no fund with a highly liquid investment
minimum breached that minimum and no fund filed a Form N-LIQUID. The Advisor
concluded that each fund's investment strategy is appropriate for an open-end
fund; that the Program operated effectively in all material respects during the
review period; and that the Program is reasonably designed to assess and manage
the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
BOARD OF TRUSTEES
Effective November 1, 2021, Denise M. Keefe was appointed as a Trustee of the
Funds. Ms. Keefe is Executive Vice President of Advocate Aurora Health and
President of Advocate Aurora Continuing Health Division (together, "Advocate"),
one of the largest integrated healthcare systems in the U.S. serving Illinois
and Wisconsin. Ms. Keefe has been employed by Advocate since 1993 and is
responsible for the Continuing Health Division's strategic direction, fiscal
management, business development, revenue enhancement, operational efficiencies,
and human resource management of 4,000 employees. Ms. Keefe also currently
serves on the boards of several organizations within the Advocate Aurora
Continuing Health Division and other health care organizations, including RML
Long Term Acute Care Hospitals (since 2014) and Senior Helpers (since 2021).
Prior thereto, Ms. Keefe was Corporate Vice President, Marketing and Business
Development for the Visiting Nurse Association of Chicago (1989 - 1992) and a
former Board Member of Sherman West Court Skilled Nursing Facility.
Page 32
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
The following tables identify the Trustees and Officers of the Trust. Unless
otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite
400, Wheaton, IL 60187.
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
NAME, YEAR OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician, Officer, Wheaton Orthopedics; 213 None
(1951) Limited Partner, Gundersen Real Estate
o Since Inception Limited Partnership (June 1992 to
December 2016)
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investors Services, Inc. 213 Director of ADM
(1957) (Futures Commission Merchant) Investor Services,
o Since Inception Inc., ADM
Investor Services
International,
Futures Industry
Association, and
National Futures
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial and 213 Director of Trust
(1956) Management Consulting) Company of
o Since Inception Illinois
Niel B. Nielson, Trustee o Indefinite Term Senior Advisor (August 2018 to Present), 213 None
(1954) Managing Director and Chief Operating
o Since Inception Officer (January 2015 to August 2018),
Pelita Harapan Educational Foundation
(Educational Products and Services)
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 213 None
Chairman of the Board Advisors L.P. and First Trust
(1955) o Since Inception Portfolios L.P.; Chairman of the
Board of Directors, BondWave LLC
(Software Development Company)
and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 33
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME AND OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
YEAR OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
(1966) Executive Officer (January 2016 to Present), Controller (January 2011
o Since January 2016 to January 2016), Senior Vice President (April 2007
to January 2016), First Trust Advisors L.P. and First
Trust Portfolios L.P.; Chief Financial Officer
(January 2016 to Present), BondWave LLC (Software
Development Company) and Stonebridge Advisors
LLC (Investment Advisor)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
(1972) Officer and Chief Accounting President (April 2012 to July 2016), First Trust
Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
(1960) Legal Officer First Trust Portfolios L.P.; Secretary and General
o Since Inception Counsel, BondWave LLC; Secretary, Stonebridge
Advisors LLC
Daniel J. Lindquist Vice President o Indefinite Term Managing Director, First Trust Advisors L.P. and
(1970) First Trust Portfolios L.P.
o Since Inception
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
(1966) and Assistant Secretary and First Trust Portfolios L.P.
o Since Inception
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1966) First Trust Portfolios L.P.
o Since Inception
Stan Ueland Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. and
(1970) First Trust Portfolios L.P.
o Since Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 34
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2021 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
professional or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
USE OF WEBSITE ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2021
Page 35
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FIRST TRUST
First Trust Exchange-Traded Fund II
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
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