Form N-CSRS - Certified Shareholder Report, Semi-Annual
09 September 2023 - 12:07AM
Edgar (US Regulatory)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22767
First Trust Exchange-Traded Fund VII
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
Registrant’s telephone number, including
area code: (630) 765-8000
Date of fiscal year end: December 31
Date of reporting period: June 30, 2023
Form N-CSR is to be used by management investment
companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required
to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use
the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information
specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection
of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”)
control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing
the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection
of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Report to Stockholders.
| (a) | | The registrant’s semi-annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows: |
First Trust Exchange-Traded Fund VII
First Trust Global Tactical Commodity Strategy
Fund (FTGC)
Semi-Annual
Report
For the Six Months Ended
June 30, 2023
First Trust Global Tactical
Commodity Strategy Fund (FTGC)
Semi-Annual Report
June 30, 2023
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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 the series of First Trust Exchange-Traded Fund VII (the
“Trust”) described in this report (First Trust Global Tactical Commodity Strategy Fund; hereinafter referred to as the “Fund”) 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 the Fund will achieve its investment objective. The 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 the Fund. See “Risk Considerations” in the Additional Information section of this
report for a discussion of certain other risks of investing in the Fund.
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 the Fund’s web page at www.ftportfolios.com.
How to Read This
Report
This report contains
information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical
information that follows may help you understand the 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 the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Global Tactical
Commodity Strategy Fund (FTGC)
Semi-Annual Letter from the Chairman
and CEO
June 30, 2023
Dear Shareholders,
First Trust is pleased
to provide you with the semi-annual report for the First Trust Global Tactical Commodity Strategy Fund (the “Fund”), which contains detailed information about the Fund for the six months ended June 30,
2023.
One economic topic that
continues to dominate headlines is whether the Federal Reserve (the “Fed”) will be able to pull off a “soft landing” for the U.S. economy, raising interest rates just high enough to curb
inflation, but not so high that they stunt economic growth and cause a recession. Historically, soft landings are exceedingly rare. Over the past 60 years, the Fed has only been able to orchestrate this phenomenon
once. This occurred between February 1994 and February 1995 when the Fed doubled the Federal Funds target rate (upper bound), raising it from 3.0% to 6.0%. For comparative purposes, the Federal Funds target rate
(upper bound) stood at 5.25% on June 30, 2023, a full 500 basis points above its most recent low of 0.25% on March 15, 2022. Inflation, as measured by the rate of change in the Consumer Price Index
(“CPI”), appears to be declining. The CPI stood at 3.0% on June 30, 2023, substantially lower than its most recent peak of 9.1% on June 30, 2022. Despite the Fed’s tighter monetary policy, the U.S.
economy continues to show resilience, with gross domestic product (“GDP”) growing in each of the past three quarters.
I am continually amazed
by the efficiencies that technological advances can have on production. Take, for example, the recent interest in artificial intelligence (“AI”). The U.S. Census Bureau reported that construction spending
by manufacturers in the U.S. has more than doubled in the past year, reaching an annual rate of nearly $190 billion in April 2023, according to Bloomberg. Manufacturing now accounts for close to 13% of all
non-government construction, its highest share on record. A portion of the growth in U.S. manufacturing is due to the CHIPS and Science Act, which provided nearly $280 billion in funding to boost domestic research and
manufacturing of semiconductors in the U.S. We have also seen the excitement regarding developments in AI drive the S&P 500® Index (the “Index”) higher this year. Year-to-date through June 30, 2023, the Index posted a total return of 16.89%. When the stock
market increases by 20% or more from its most recent low, it is often referred to as a “bull market.” On June 8, 2023, the Index closed at 4,293.93, 20.04% above its most recent low of 3,577.03 (which
occurred on October 12, 2022).
The U.S. economy has
been resilient, posting positive changes to GDP even as monetary policy tightened significantly. That said, there are also economic indicators that point to the potential for weakness over the coming quarters. The
Conference Board, a non-profit business membership and research group organization, reported that its Leading Economic Index, which is composed of 10 economic indicators whose changes tend to precede changes in the
overall economy, fell by 0.7% to a reading of 106.1 in June 2023, according to Reuters. The result represents the fifteenth consecutive monthly decline in the index, the longest streak of month-over-month decreases
since just before the financial crisis in 2007. From our perspective, even if the Fed can pull off a soft landing, it is likely to be a very bumpy ride.
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 Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust
Advisors L.P.
Fund Performance
Overview (Unaudited)
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
The First Trust Global
Tactical Commodity Strategy Fund (the “Fund”) seeks to provide total return by providing investors with commodity exposure while seeking a relatively stable risk profile. The Fund is an actively managed
exchange-traded fund (“ETF”) that seeks to achieve attractive risk adjusted returns by investing in commodity futures contracts, exchange-traded commodity linked instruments, and commodity linked total
return swaps (collectively, “Commodities Instruments”) through a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The Fund will not invest
directly in Commodities Instruments. The Fund expects to gain exposure to these investments exclusively by investing in the Subsidiary. The Subsidiary is advised by First Trust Advisors L.P., the Fund’s
investment advisor (the “Advisor”).
The Fund’s
investment in the Subsidiary is intended to provide the Fund with exposure to commodity markets within the limits of current federal income tax laws applicable to investment companies such as the Fund, which limit the
ability of investment companies to invest directly in Commodities Instruments. The Subsidiary has the same investment objective as the Fund, but unlike the Fund, it may invest without limitation in Commodities
Instruments. Except as otherwise noted, references to the Fund’s investments include the Fund’s indirect investments through the Subsidiary. The Fund will invest up to 25% of its total assets in the
Subsidiary.
The Subsidiary seeks
to make investments generally in Commodities Instruments while managing volatility. Investment weightings of the underlying Commodities Instruments held by the Subsidiary are rebalanced in an attempt to stabilize risk
levels. The dynamic weighting process is designed to result in a disciplined, systematic investment process, which is keyed off of the Advisor’s volatility forecasting process. The Subsidiary may have both long
and short positions in Commodities Instruments. However, for a given Commodity Instrument the Subsidiary will provide a net long exposure.
The remainder of the
Fund’s assets will primarily be invested in: (1) U.S. government and agency securities with maturities of two years or less; (2) short-term repurchase agreements; (3) money market instruments; (4) ETFs and other
investment companies registered under the Investment Company Act of 1940, as amended (the “1940 Act”) or established and registered in Canada or any province thereof; (5) Canadian ETFs; and (6) cash. The
Fund uses such instruments as investments and to collateralize the Subsidiary’s Commodities Instruments exposure on a day-to-day basis.
| Performance
|
|
|
|
|
|
|
|
|
|
|
| Average Annual Total Returns
|
| Cumulative Total Returns
|
|
| 6 Months
Ended
6/30/23
| 1 Year
Ended
6/30/23
| 5 Years
Ended
6/30/23
| Inception
(10/22/13)
to 6/30/23
|
| 5 Years
Ended
6/30/23
| Inception
(10/22/13)
to 6/30/23
|
| Fund Performance
|
|
|
|
|
|
|
|
| NAV
| -5.13%
| -4.36%
| 6.11%
| -0.63%
|
| 34.52%
| -5.95%
|
| Market Price
| -5.49%
| -4.69%
| 6.07%
| -0.66%
|
| 34.27%
| -6.21%
|
| Index Performance
|
|
|
|
|
|
|
|
| Bloomberg Commodity Index
| -7.79%
| -9.61%
| 4.73%
| -1.32%
|
| 26.00%
| -12.08%
|
| S&P GSCI® Total Return Index
| -7.54%
| -14.22%
| 2.75%
| -4.11%
|
| 14.56%
| -33.39%
|
| S&P 500® Index
| 16.89%
| 19.59%
| 12.31%
| 12.20%
|
| 78.66%
| 205.03%
|
Total returns for the
period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual 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.
The 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 the Fund did not trade in the secondary market until after its inception, for the
period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the 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 the Fund at NAV and Market Price, respectively.
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. 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 the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than
their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance
Overview (Unaudited) (Continued)
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
| Fund Allocation
| % of Net Assets
|
| U.S. Treasury Bills
| 52.4%
|
| Money Market Funds
| 23.7
|
| Net Other Assets and Liabilities*
| 23.9
|
| Total
| 100.0%
|
| *
| Includes variation margin on futures contracts.
|
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.
Portfolio Management
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
Semi-Annual Report
June 30, 2023
(Unaudited)
Advisor
First Trust Advisors L.P.
(“First Trust” or the “Advisor”) serves as the investment advisor, commodity pool operator and commodity trading advisor to the First Trust Global Tactical Commodity Strategy Fund (the
“Fund”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative
services necessary for the management of the Fund.
Portfolio Management
Team
John Gambla – CFA,
FRM, PRM, Senior Portfolio Manager, Alternatives Investment Team of First Trust
Rob A. Guttschow –
CFA, Senior Portfolio Manager, Alternatives Investment Team of First Trust
The portfolio managers
are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as a part of the portfolio management team of the Fund since 2013.
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Understanding Your Fund
Expenses
June 30, 2023
(Unaudited)
As a shareholder of the
First Trust Global Tactical Commodity Strategy Fund (the “Fund”), 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 of investing in the Fund 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 June 30, 2023.
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 the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is
not the 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 Fund 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.
|
| Beginning
Account Value
January 1, 2023
| Ending
Account Value
June 30, 2023
| Annualized
Expense Ratio
Based on the
Six-Month
Period
| Expenses Paid
During the
Six-Month
Period (a)
|
| First Trust Global Tactical Commodity Strategy Fund (FTGC)
|
| Actual
| $1,000.00
| $948.70
| 0.95%
| $4.59
|
| Hypothetical (5% return before expenses)
| $1,000.00
| $1,020.08
| 0.95%
| $4.76
|
| (a)
| Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (January 1, 2023 through June
30, 2023), multiplied by 181/365 (to reflect the six-month period).
|
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Portfolio of
Investments
June 30, 2023
(Unaudited)
Principal
Value
|
| Description
|
| Stated
Coupon
|
| Stated
Maturity
|
| Value
|
| U.S. TREASURY BILLS – 52.4%
|
| $170,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 07/06/23
|
| $169,929,981
|
| 175,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 08/10/23
|
| 174,052,837
|
| 170,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 09/14/23
|
| 168,222,613
|
| 170,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 10/12/23
|
| 167,528,832
|
| 175,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 11/09/23
|
| 171,750,663
|
| 170,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 11/16/23
|
| 166,676,500
|
| 170,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 12/07/23
|
| 166,142,307
|
| 170,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 12/14/23
|
| 165,958,690
|
|
|
| Total U.S. Treasury Bills
|
| 1,350,262,423
|
|
|
| (Cost $1,349,985,114)
|
|
|
|
|
|
|
| Shares
|
| Description
|
| Value
|
| MONEY MARKET FUNDS – 23.7%
|
| 291,000,000
|
| Dreyfus Government Cash Management Fund - Institutional Shares - 5.00% (b)
|
| 291,000,000
|
| 321,500,000
|
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 4.94% (b)
|
| 321,500,000
|
|
|
| Total Money Market Funds
|
| 612,500,000
|
|
|
| (Cost $612,500,000)
|
|
|
|
| Total Investments – 76.1%
|
| 1,962,762,423
|
|
| (Cost $1,962,485,114)
|
|
|
|
| Net Other Assets and Liabilities – 23.9%
|
| 616,717,798
|
|
| Net Assets – 100.0%
|
| $2,579,480,221
|
The following futures
contracts of the Fund’s wholly-owned subsidiary were open at June 30, 2023 (see Note 2B - Futures Contracts in the Notes to Consolidated Financial Statements):
| Futures Contracts Long:
|
| Number
of
Contracts
|
| Notional
Value
|
| Expiration
Date
|
| Unrealized
Appreciation
(Depreciation)/
Value
|
| Brent Crude Oil Futures
|
| 787
|
| $59,347,670
|
| Jul–23
|
| $2,217,584
|
| Brent Crude Oil Futures
|
| 75
|
| 5,647,500
|
| Aug–23
|
| 30,772
|
| Cattle Feeder Futures
|
| 205
|
| 25,376,438
|
| Aug–23
|
| 1,568,500
|
| Cocoa Futures
|
| 1,751
|
| 58,711,030
|
| Sep–23
|
| 5,341,035
|
| Coffee “C” Futures
|
| 649
|
| 38,696,625
|
| Sep–23
|
| (4,653,603)
|
| Copper Futures
|
| 1,421
|
| 133,556,237
|
| Sep–23
|
| 550,364
|
| Corn Futures
|
| 7,185
|
| 177,738,937
|
| Dec–23
|
| (14,671,450)
|
| Cotton No. 2 Futures
|
| 2,550
|
| 102,471,750
|
| Dec–23
|
| 119,164
|
| Gasoline RBOB Futures
|
| 581
|
| 62,100,650
|
| Jul–23
|
| 5,813,679
|
| Gasoline RBOB Futures
|
| 1,030
|
| 106,527,750
|
| Aug–23
|
| 2,002,063
|
| Gasoline RBOB Futures
|
| 278
|
| 25,897,368
|
| Sep–23
|
| 297,238
|
| Gold 100 Oz. Futures
|
| 903
|
| 174,224,820
|
| Aug–23
|
| (10,273,269)
|
| Kansas City Hard Red Winter Wheat Futures
|
| 1,695
|
| 67,800,000
|
| Sep–23
|
| (223,179)
|
| Lean Hogs Futures
|
| 615
|
| 22,779,600
|
| Aug–23
|
| 122,336
|
| Live Cattle Futures
|
| 665
|
| 47,128,550
|
| Aug–23
|
| 4,165,713
|
| LME Aluminum Futures
|
| 1,973
|
| 105,925,437
|
| Sep–23
|
| (8,831,959)
|
| LME Lead Futures
|
| 1,266
|
| 66,544,125
|
| Sep–23
|
| (1,210,951)
|
| LME Nickel Futures
|
| 630
|
| 77,524,020
|
| Sep–23
|
| (11,627,077)
|
| LME Zinc Futures
|
| 629
|
| 37,570,956
|
| Sep–23
|
| (3,727,460)
|
| Low Sulphur Gasoil “G” Futures
|
| 1,447
|
| 101,651,750
|
| Aug–23
|
| 304,008
|
| Low Sulphur Gasoil “G” Futures
|
| 559
|
| 39,171,925
|
| Sep–23
|
| 161,076
|
| Natural Gas Futures
|
| 1,838
|
| 51,427,240
|
| Jul–23
|
| 8,458,425
|
| Natural Gas Futures
|
| 1,755
|
| 48,683,700
|
| Aug–23
|
| 5,826,777
|
Page 6
See Notes to Consolidated Financial
Statements
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Portfolio of
Investments (Continued)
June 30, 2023
(Unaudited)
| Futures Contracts Long: (Continued)
|
| Number
of
Contracts
|
| Notional
Value
|
| Expiration
Date
|
| Unrealized
Appreciation
(Depreciation)/
Value
|
| Natural Gas Futures
|
| 616
|
| $17,537,520
|
| Sep–23
|
| $253,022
|
| NY Harbor ULSD Futures
|
| 48
|
| 4,934,362
|
| Jul–23
|
| 374,734
|
| NY Harbor ULSD Futures
|
| 463
|
| 47,487,132
|
| Aug–23
|
| 1,405,187
|
| NY Harbor ULSD Futures
|
| 356
|
| 36,449,986
|
| Sep–23
|
| 327,999
|
| Silver Futures
|
| 837
|
| 96,338,700
|
| Sep–23
|
| (4,854,062)
|
| Soybean Futures
|
| 3,322
|
| 223,113,825
|
| Nov–23
|
| 24,581,057
|
| Soybean Meal Futures
|
| 1,642
|
| 65,236,660
|
| Dec–23
|
| 4,925,163
|
| Soybean Oil Futures
|
| 5,145
|
| 182,040,390
|
| Dec–23
|
| 23,560,981
|
| Sugar #11 (World) Futures
|
| 4,431
|
| 113,100,389
|
| Sep–23
|
| (8,102,574)
|
| Wheat Futures
|
| 670
|
| 21,808,500
|
| Sep–23
|
| 976,689
|
| WTI Crude Futures
|
| 431
|
| 30,506,180
|
| Aug–23
|
| 400,830
|
| WTI Crude Futures
|
| 534
|
| 37,764,480
|
| Sep–23
|
| 911,679
|
|
|
| Total
|
| $2,512,822,202
|
|
|
| $26,520,491
|
| (a)
| Zero coupon bond.
|
| (b)
| Rate shown reflects yield as of June 30, 2023.
|
Valuation Inputs
A summary of the inputs
used to value the Fund’s investments as of June 30, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Consolidated Financial Statements):
| ASSETS TABLE
|
|
| Total
Value at
6/30/2023
| Level 1
Quoted
Prices
| Level 2
Significant
Observable
Inputs
| Level 3
Significant
Unobservable
Inputs
|
U.S. Treasury Bills
| $ 1,350,262,423
| $ —
| $ 1,350,262,423
| $ —
|
Money Market Funds
| 612,500,000
| 612,500,000
| —
| —
|
Total Investments
| 1,962,762,423
| 612,500,000
| 1,350,262,423
| —
|
Futures Contracts*
| 96,213,805
| 96,213,805
| —
| —
|
Total
| $ 2,058,976,228
| $ 708,713,805
| $ 1,350,262,423
| $—
|
|
|
| LIABILITIES TABLE
|
|
| Total
Value at
6/30/2023
| Level 1
Quoted
Prices
| Level 2
Significant
Observable
Inputs
| Level 3
Significant
Unobservable
Inputs
|
Futures Contracts*
| $ (69,693,314)
| $ (69,693,314)
| $ —
| $ —
|
| *
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is
presented on the Consolidated Statement of Assets and Liabilities.
|
See Notes to Consolidated Financial
Statements
Page 7
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Statement of
Assets and Liabilities
June 30, 2023
(Unaudited)
| ASSETS:
|
|
Investments, at value
| $ 1,962,762,423
|
Cash
| 319,028,578
|
Cash segregated as collateral for open futures contracts
| 277,624,354
|
| Receivables:
|
|
Variation margin
| 35,300,085
|
Dividends
| 4,821,912
|
Investment securities sold
| 3,589,291
|
Fund shares sold
| 5,385
|
Total Assets
| 2,603,132,028
|
| LIABILITIES:
|
|
| Payables:
|
|
Fund shares redeemed
| 21,541,131
|
Investment advisory fees
| 2,110,676
|
Total Liabilities
| 23,651,807
|
NET ASSETS
| $2,579,480,221
|
| NET ASSETS consist of:
|
|
Paid-in capital
| $ 2,788,689,307
|
Par value
| 1,130,033
|
Accumulated distributable earnings (loss)
| (210,339,119)
|
NET ASSETS
| $2,579,480,221
|
NET ASSET VALUE, per share
| $22.83
|
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)
| 113,003,334
|
Investments, at cost
| $1,962,485,114
|
Page 8
See Notes to Consolidated Financial
Statements
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Statement of
Operations
For the Six Months Ended
June 30, 2023 (Unaudited)
| INVESTMENT INCOME:
|
|
Interest
| $ 36,609,690
|
Dividends
| 30,722,696
|
Total investment income
| 67,332,386
|
| EXPENSES:
|
|
Investment advisory fees
| 14,200,876
|
Total expenses
| 14,200,876
|
NET INVESTMENT INCOME (LOSS)
| 53,131,510
|
| NET REALIZED AND UNREALIZED GAIN (LOSS):
|
|
| Net realized gain (loss) on:
|
|
Investments
| 17,563
|
Futures contracts
| (182,869,516)
|
Net realized gain (loss)
| (182,851,953)
|
| Net change in unrealized appreciation (depreciation) on:
|
|
Investments
| (112,907)
|
Futures contracts
| (44,591,771)
|
Net change in unrealized appreciation (depreciation)
| (44,704,678)
|
NET REALIZED AND UNREALIZED GAIN (LOSS)
| (227,556,631)
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
| $(174,425,121)
|
See Notes to Consolidated Financial
Statements
Page 9
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Statements of
Changes in Net Assets
|
| Six Months
Ended
6/30/2023
(Unaudited)
|
| Year
Ended
12/31/2022
|
| OPERATIONS:
|
|
|
|
Net investment income (loss)
| $ 53,131,510
|
| $ 19,079,378
|
Net realized gain (loss)
| (182,851,953)
|
| 198,246,266
|
Net change in unrealized appreciation (depreciation)
| (44,704,678)
|
| 45,214,928
|
Net increase (decrease) in net assets resulting from operations
| (174,425,121)
|
| 262,540,572
|
| DISTRIBUTIONS TO SHAREHOLDERS FROM:
|
|
|
|
Investment operations
| (41,900,666)
|
| (355,942,657)
|
| SHAREHOLDER TRANSACTIONS:
|
|
|
|
Proceeds from shares sold
| 134,965,761
|
| 2,714,257,172
|
Cost of shares redeemed
| (715,102,642)
|
| (1,224,296,838)
|
Net increase (decrease) in net assets resulting from shareholder transactions
| (580,136,881)
|
| 1,489,960,334
|
Total increase (decrease) in net assets
| (796,462,668)
|
| 1,396,558,249
|
| NET ASSETS:
|
|
|
|
Beginning of period
| 3,375,942,889
|
| 1,979,384,640
|
End of period
| $2,579,480,221
|
| $3,375,942,889
|
| CHANGES IN SHARES OUTSTANDING:
|
|
|
|
Shares outstanding, beginning of period
| 138,203,334
|
| 86,003,334
|
Shares sold
| 5,800,000
|
| 98,950,000
|
Shares redeemed
| (31,000,000)
|
| (46,750,000)
|
Shares outstanding, end of period
| 113,003,334
|
| 138,203,334
|
Page 10
See Notes to Consolidated Financial
Statements
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Financial
Highlights
For a share outstanding
throughout each period
|
| Six Months
Ended
6/30/2023
(Unaudited)
|
| Year Ended December 31,
|
|
| 2022
|
| 2021
|
| 2020
|
| 2019
|
| 2018
|
|
Net asset value, beginning of period
| $ 24.43
|
| $ 23.02
|
| $ 19.27
|
| $ 18.94
|
| $ 17.92
|
| $ 20.77
|
| Income from investment operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
| 0.41 (a)
|
| 0.13 (a)
|
| (0.22) (a)
|
| (0.14)
|
| 0.26
|
| 0.18
|
Net realized and unrealized gain (loss)
| (1.66)
|
| 3.82
|
| 5.63
|
| 0.47
|
| 0.91
|
| (2.89)
|
Total from investment operations
| (1.25)
|
| 3.95
|
| 5.41
|
| 0.33
|
| 1.17
|
| (2.71)
|
| Distributions paid to shareholders from:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
| (0.35)
|
| (2.54)
|
| (1.66)
|
| —
|
| (0.15)
|
| (0.11)
|
Return of capital
| —
|
| —
|
| —
|
| —
|
| —
|
| (0.03)
|
Total distributions
| (0.35)
|
| (2.54)
|
| (1.66)
|
| —
|
| (0.15)
|
| (0.14)
|
Net asset value, end of period
| $22.83
|
| $24.43
|
| $23.02
|
| $19.27
|
| $18.94
|
| $17.92
|
Total return (b)
| (5.13)%
|
| 17.14%
|
| 28.09%
|
| 1.74%
|
| 6.55%
|
| (13.04)%
|
| Ratios to average net assets/supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000’s)
| $ 2,579,480
|
| $ 3,375,943
|
| $ 1,979,385
|
| $ 238,039
|
| $ 163,876
|
| $ 168,520
|
Ratio of total expenses to average net assets
| 0.95% (c)
|
| 0.95%
|
| 0.95%
|
| 0.95%
|
| 0.95%
|
| 0.95%
|
Ratio of net investment income (loss) to average net assets
| 3.54% (c)
|
| 0.48%
|
| (0.94)%
|
| (0.54)%
|
| 1.13%
|
| 0.75%
|
Portfolio turnover rate (d)
| 0%
|
| 0%
|
| 0%
|
| 0%
|
| 0%
|
| 0%
|
| (a)
| Based on average shares outstanding.
|
| (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, derivatives and in-kind transactions.
|
See Notes to Consolidated Financial
Statements
Page 11
Notes to Consolidated Financial Statements
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
1. Organization
First Trust
Exchange-Traded Fund VII (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on November 6, 2012, and is registered with the Securities and Exchange
Commission (“SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust consists of two
funds that are currently offering shares. This report covers the First Trust Global Tactical Commodity Strategy Fund (the “Fund”), a diversified series of the Trust, which trades under the ticker
“FTGC” on The Nasdaq Stock Market LLC (“Nasdaq”) and commenced operations on October 22, 2013. Unlike conventional mutual funds, the 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 Fund is an actively
managed exchange-traded fund. The investment objective of the Fund seeks to provide total return by providing investors with commodity exposure while seeking a relatively stable risk profile. The Fund seeks to achieve
attractive risk adjusted returns by investing in commodity futures contracts, exchange-traded commodity linked instruments, and commodity linked total return swaps (collectively, “Commodities Instruments”)
through a wholly-owned subsidiary of the Fund, FT Cayman Subsidiary II, organized under the laws of the Cayman Islands (the “Subsidiary”). The Fund will not invest directly in Commodities Instruments. The
Fund expects to gain exposure to these investments exclusively by investing in the Subsidiary. The Fund will invest up to 25% of its total assets in the Subsidiary. As of June 30, 2023, the Fund invested 18.1% of the
Fund’s total assets in the Subsidiary. There can be no assurance that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors.
2. Significant
Accounting Policies
The Fund is considered an
investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The
consolidated financial statements include the accounts on a consolidated basis of the Subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The following is a summary of
significant accounting policies consistently followed by the Fund in the preparation of the consolidated financial statements. The preparation of the consolidated 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 consolidated
financial statements. Actual results could differ from those estimates.
A. Portfolio
Valuation
The 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. The Fund’s NAV is calculated 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 shares outstanding.
The Fund’s
investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as 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 Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the
“Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the
Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Consolidated Portfolio of Investments. The Fund’s investments are valued as follows:
Exchange-traded futures contracts are valued at the end of the day settlement price.
U.S.
Treasuries are fair valued on the basis of valuations provided by a third-party pricing service approved by the Trust’s Board of Trustees.
Shares
of open-end funds are valued based on NAV per share.
If the Fund’s
investments are not able to be priced by their pre-established pricing methods, such investments may be valued by the Trust’s Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair
value. A variety of factors may be considered in determining the fair value of such investments.
Valuing the Fund’s
holdings using fair value pricing will result in using prices for those holdings that may differ from current market valuations. The Subsidiary’s holdings will be valued in the same manner as the Fund’s
holdings.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
The Fund is 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:
| •
| 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.
|
| •
| 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.
|
| •
| 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 the Fund’s investments as of June
30, 2023, is included with the Fund’s Consolidated Portfolio of Investments.
B. Futures
Contracts
The Fund, through the
Subsidiary, may purchase and sell exchange-listed commodity contracts. When the Subsidiary purchases a listed futures contract, it agrees to purchase a specified reference asset (e.g., commodity) at a specified future
date. When the Subsidiary sells or shorts a listed futures contract, it agrees to sell a specified reference asset (e.g., commodity) at a specified future date. The price at which the purchase and sale will take place
is fixed when the Subsidiary enters into the contract. The exchange clearing corporation is the ultimate counterparty for all exchange-listed contracts, so credit risk is limited to the creditworthiness of the
exchange’s clearing corporation. Margin deposits are posted as collateral with the clearing broker and, in turn, with the exchange clearing corporation. Open futures contracts can be closed out prior to
settlement by entering into an offsetting transaction in a matching futures contract. If the Subsidiary is not able to enter into an offsetting transaction, the Subsidiary will continue to be required to maintain
margin deposits on the futures contract. When the contract is closed or expires, the Subsidiary records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Consolidated Statement of Operations.
Exchange-listed commodity
futures contracts are generally based upon commodities within the six principal commodity groups: energy, industrial metals, agriculture, precious metals, foods and fibers, and livestock. The price of a commodity
futures contract will reflect the storage costs of purchasing the physical commodity. These storage costs include the time value of money invested in the physical commodity plus the actual costs of storing the
commodity less any benefits from ownership of the physical commodity that are not obtained by the holder of a futures contract (this is sometimes referred to as the “convenience yield”). To the extent that
these storage costs change for an underlying commodity while the Subsidiary is in a long position on that commodity, the value of the futures contract may change proportionately.
Upon entering into a
futures contract, the Subsidiary must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts
are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Consolidated Statement of Operations.
This daily fluctuation in value of the contracts is also known as variation margin and is included as “Variation margin” payable or receivable on the Consolidated Statement of Assets and Liabilities.
When the Subsidiary
purchases or sells a futures contract, the Subsidiary is required to collateralize its position in order to limit the risk associated with the use of leverage and other related risks. To collateralize its position,
the Subsidiary segregates assets consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the unrealized depreciation of the futures
contract or otherwise collateralize its position in a manner consistent with the 1940 Act or the 1940 Act Rules and SEC interpretations thereunder. As the Subsidiary continues to engage in the described securities
trading practices and properly segregates assets, the segregated assets will function as a practical limit on the amount of leverage which the Subsidiary may undertake and on the potential increase in the speculative
character of the Subsidiary’s outstanding portfolio investments.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
Additionally, such segregated assets
generally ensure the availability of adequate funds to meet the obligations of the Subsidiary arising from such investment activities.
C. Cash
The Fund holds assets
equal to or greater than the full notional exposure of the futures contracts. These assets may consist of cash and other short-term securities to comply with SEC guidance with respect to coverage of futures contracts
by registered investment companies. At June 30, 2023, the Fund had restricted cash held of $277,624,354, which is included in “Cash segregated as collateral for open futures contracts” on the Consolidated
Statement of Assets and Liabilities.
D. Investment
Transactions and Investment Income
Investment transactions
are recorded as of the trade date. Realized gains and losses from investment 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. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
E. Dividends and
Distributions to Shareholders
Dividends from net
investment income, if any, are declared and paid quarterly by the Fund. The Fund distributes its net realized capital gains, if any, to shareholders at least annually. The Fund may also designate a portion of the
amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may
be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net
investment income and realized capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the consolidated 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 portfolio securities held by
the Fund 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 consolidated financial statement
and tax purposes, will reverse at some time in the future.
The tax character of
distributions paid by the Fund during the fiscal year ended December 31, 2022, was as follows:
| Distributions paid from:
|
|
Ordinary income
| $355,942,657
|
Capital gains
| —
|
Return of capital
| —
|
As of December 31, 2022,
the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income
| $4,856,129
|
Accumulated capital and other gain (loss)
| 47,199,904
|
Net unrealized appreciation (depreciation)
| 24,302,574
|
F. Income Taxes
The 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 (the “Code”), 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, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Subsidiary is
classified as a controlled foreign corporation under Subchapter N of the Code. Therefore, the Fund is required to increase its taxable income by its share of the Subsidiary’s income, whether or not such earnings
are distributed by the Subsidiary to the Fund. Net investment losses of the Subsidiary cannot be deducted by the Fund in the current period nor carried forward to offset taxable income in future periods.
The 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.
The Fund is subject to certain
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
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 December 31, 2022, for federal income tax purposes, the Fund had no
non-expiring capital loss carryforwards.
The Fund is 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, 2021,
and 2022 remain open to federal and state audit. As of June 30, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the
Fund’s consolidated financial statements for uncertain tax positions.
As of June 30, 2023, the
aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax
purposes were as follows:
| Tax Cost
|
| Gross
Unrealized
Appreciation
|
| Gross
Unrealized
(Depreciation)
|
| Net Unrealized
Appreciation
(Depreciation)
|
| $1,962,485,114
|
| $95,005,322
|
| $(68,207,522)
|
| $26,797,800
|
G. Expenses
Expenses, other than the
investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).
3. Investment
Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the
investment advisor to the Fund, 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 Fund’s and the Subsidiary’s investment portfolios, managing
the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s and the Subsidiary’s expenses, including
the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund
to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| Breakpoints
|
|
|
|
|
|
|
|
| Fund net assets up to and including $2.5 billion
| 0.95000%
|
|
|
|
|
|
|
| Fund net assets greater than $2.5 billion up to and including $5 billion
| 0.92625%
|
|
|
|
|
|
|
| Fund net assets greater than $5 billion up to and including $7.5 billion
| 0.90250%
|
|
|
|
|
|
|
| Fund net assets greater than $7.5 billion up to and including $10 billion
| 0.87875%
|
|
|
|
|
|
|
| Fund net assets greater than $10 billion
| 0.85500%
|
|
|
|
|
|
|
First Trust also provides
fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. The Subsidiary does not pay First Trust a separate management fee.
The Trust has multiple
service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BBH is responsible for custody of the Fund’s assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund’s investments and
cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund.
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 target outcome fund or an index fund.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
Additionally, the Lead
Independent Trustee and the Chairs 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
Chairs 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
The cost of purchases and
proceeds from sales of securities, excluding short-term investments, derivatives, and in-kind transactions, for the six months ended June 30, 2023, were $0 and $0, respectively.
For the six months ended
June 30, 2023, the Fund did not have any in-kind purchases or sales.
5. Derivative
Transactions
The following table
presents the types of derivatives held by the Subsidiary at June 30, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Consolidated Statement of Assets and
Liabilities.
|
|
|
|
| Asset Derivatives
|
| Liability Derivatives
|
Derivative
Instrument
|
| Risk
Exposure
|
| Consolidated
Statement of Assets and
Liabilities Location
|
| Value
|
| Consolidated
Statement of Assets and
Liabilities Location
|
| Value
|
| Futures contracts
|
| Commodity Risk
|
| Unrealized appreciation
on futures contracts*
|
| $ 94,696,075
|
| Unrealized depreciation
on futures contracts*
|
| $ 68,175,584
|
*Includes cumulative
appreciation/depreciation on futures contracts as reported in the Consolidated Portfolio of Investments. Only the current day’s variation margin is presented on the Consolidated Statement of Assets and
Liabilities.
The following table
presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the six months ended June 30, 2023, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
| Consolidated Statement of Operations Location
|
|
| Commodity Risk Exposure
|
|
| Net realized gain (loss) on futures contracts
| $(182,869,516)
|
| Net change in unrealized appreciation (depreciation) on futures contracts
| (44,591,771)
|
During the six months
ended June 30, 2023, the notional value of futures contracts opened and closed were $10,392,868,134 and $10,923,255,765, respectively.
The Fund does not have
the right to offset financial assets and liabilities related to futures contracts on the Consolidated Statement of Assets and Liabilities.
6. Creations,
Redemptions and Transaction Fees
The 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 the 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, the 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 the 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 the 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 the Fund’s shares and underlying
securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
The 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 the 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.
The 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 the 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 the 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.
7. 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 Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year
to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or to provide 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 Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before April 30, 2024.
8. Indemnification
The Trust, on behalf of
the Fund, 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.
9. Subsequent
Events
Management has evaluated
the impact of all subsequent events on the Fund through the date the consolidated financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the
consolidated financial statements that have not already been disclosed.
Additional Information
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(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 the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The 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. The 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 the Fund is available to investors within 60 days after the period to which it relates. The
Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
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.
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
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
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 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 has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance
that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an
alternative rate will have the same volume or liquidity. 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.
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
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. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. 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. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and
volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as
fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global
financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be
effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the
trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s
shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
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; capital controls; 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.
Preferred Securities
Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a
company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with
respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an
issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities,
including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency
and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd
lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be
less than the value at which such securities
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
have been held by the fund. Odd lots
often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to
the fund.
| NOT FDIC INSURED
| NOT BANK GUARANTEED
| MAY LOSE VALUE
|
Advisory Agreement
Board Considerations
Regarding Approval of Continuation of Investment Management Agreement
The Board of Trustees of
First Trust Exchange-Traded Fund VII (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Fund Agreement”) with
First Trust Advisors L.P. (the “Advisor” ) on behalf of the First Trust Global Tactical Commodity Strategy Fund (the “Fund”). The Board approved the continuation of the Fund Agreement for
a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. Because the Fund invests in commodity futures contracts, exchange-traded commodity linked instruments and commodity linked total
return swaps through a wholly-owned subsidiary of the Fund (the “Subsidiary”), the Board, including the Independent Trustees, also approved the continuation of an Investment Management Agreement (the
“Subsidiary Agreement” and together with the Fund Agreement, the “Agreements”) with the Advisor for the Subsidiary, also for a one-year period. The Board determined that the continuation
of the Agreements 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, 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 17, 2023 and June 4–5, 2023, 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 the Fund and the Subsidiary (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule
payable by the 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 clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the
Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the 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 the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect 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 17, 2023, 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 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangements
between the Trust and the Advisor and between the Advisor and the Subsidiary continue to be reasonable business arrangements from the 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 the
Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the
Agreements, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreements. The Board considered that the Advisor is responsible for the overall management and
administration of the Trust, the Fund and the Subsidiary, and reviewed all of the services provided by the Advisor to the Fund and the Subsidiary, as well as the background and experience of the persons responsible
for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Alternatives Investment Team is responsible for the day-to-day management of the Fund’s and
the Subsidiary’s investments. The Board considered the background and experience of the members of the Alternatives Investment Team and noted the Board’s prior meetings with members of the Team.
The Board considered the Advisor’s statement that it applies the same oversight model internally with its Alternatives Investment Team as it uses for overseeing external sub-advisors, including portfolio
risk monitoring and performance review. 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 the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. The Board
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
also considered a report from the
Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written
materials and at the April 17, 2023 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 Fund
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, the Fund and the Subsidiary by the Advisor under the Agreements have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objective, policies and
restrictions.
The Board considered the
unitary fee rate schedule payable by the Fund under the Fund Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the 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 Fund 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 noted
that the Advisor receives no compensation under the Subsidiary Agreement and pays the expenses of the Subsidiary. The Board received and reviewed information showing the fee rates and expense ratios of the peer
funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the 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 total (net) expense ratio for the Fund was above the median total (net)
expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and
discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including the limited number of actively-managed ETFs following a commodity-based strategy, 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 Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule 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 the Fund and the other funds in the First Trust Fund
Complex.
The Board considered
performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance
reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing
the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted
that the Fund outperformed the Performance Universe median and the benchmark index for the one-, three- and five-year periods ended December 31, 2022.
On the basis of all the
information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the 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 Fund at current asset levels and whether the Fund may benefit from any
economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds.
The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to
build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor,
but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of
sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the
Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the 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 the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund.
The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with
the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board also considered the Advisor’s compensation for fund reporting services provided to the
Fund pursuant to a separate Fund Reporting Services Agreement, which is
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
June 30, 2023
(Unaudited)
paid from the unitary fee. The
Board concluded that the character and amount of potential indirect 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 the 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 Fund 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 17, 2023
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 17, 2022 through the Liquidity Committee’s annual meeting held on March 23, 2023 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 Fund primarily holds assets that are
highly liquid investments, the Fund has not adopted any highly liquid investment minimum.
As stated in the written
report, during the review period, two funds breached the 15% limitation on illiquid investments for one day each, as a result of an unscheduled week-long closure of the stock exchange in Istanbul following devastating
earthquakes in February, causing all Turkish equities to be re-classified as “illiquid” for one day. Each fund filed a Form N-RN on the day after the breach occurred, and one day later after the breach was
cured. No fund with a highly liquid investment minimum breached that minimum during the reporting period. 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.
This page intentionally left blank
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite
400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman &
Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund VII
First Trust Alternative Absolute Return Strategy ETF (FAAR)
Semi-Annual
Report
For the Six Months Ended
June 30, 2023
First Trust Alternative Absolute
Return Strategy ETF (FAAR)
Semi-Annual Report
June 30, 2023
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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 the series of First Trust Exchange-Traded Fund VII (the
“Trust”) described in this report (First Trust Alternative Absolute Return Strategy ETF; hereinafter referred to as the “Fund”) 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 the Fund will achieve its investment objective. The 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 the Fund. See “Risk Considerations” in the Additional Information section of this
report for a discussion of certain other risks of investing in the Fund.
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 the Fund’s web page at www.ftportfolios.com.
How to Read This
Report
This report contains
information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical
information that follows may help you understand the 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 the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Alternative Absolute
Return Strategy ETF (FAAR)
Semi-Annual Letter from the Chairman
and CEO
June 30, 2023
Dear Shareholders,
First Trust is pleased
to provide you with the semi-annual report for the First Trust Alternative Absolute Return Strategy ETF (the “Fund”), which contains detailed information about the Fund for the six months ended June 30,
2023.
One economic topic that
continues to dominate headlines is whether the Federal Reserve (the “Fed”) will be able to pull off a “soft landing” for the U.S. economy, raising interest rates just high enough to curb
inflation, but not so high that they stunt economic growth and cause a recession. Historically, soft landings are exceedingly rare. Over the past 60 years, the Fed has only been able to orchestrate this phenomenon
once. This occurred between February 1994 and February 1995 when the Fed doubled the Federal Funds target rate (upper bound), raising it from 3.0% to 6.0%. For comparative purposes, the Federal Funds target rate
(upper bound) stood at 5.25% on June 30, 2023, a full 500 basis points above its most recent low of 0.25% on March 15, 2022. Inflation, as measured by the rate of change in the Consumer Price Index
(“CPI”), appears to be declining. The CPI stood at 3.0% on June 30, 2023, substantially lower than its most recent peak of 9.1% on June 30, 2022. Despite the Fed’s tighter monetary policy, the U.S.
economy continues to show resilience, with gross domestic product (“GDP”) growing in each of the past three quarters.
I am continually amazed
by the efficiencies that technological advances can have on production. Take, for example, the recent interest in artificial intelligence (“AI”). The U.S. Census Bureau reported that construction spending
by manufacturers in the U.S. has more than doubled in the past year, reaching an annual rate of nearly $190 billion in April 2023, according to Bloomberg. Manufacturing now accounts for close to 13% of all
non-government construction, its highest share on record. A portion of the growth in U.S. manufacturing is due to the CHIPS and Science Act, which provided nearly $280 billion in funding to boost domestic research and
manufacturing of semiconductors in the U.S. We have also seen the excitement regarding developments in AI drive the S&P 500® Index (the “Index”) higher this year. Year-to-date through June 30, 2023, the Index posted a total return of 16.89%. When the stock
market increases by 20% or more from its most recent low, it is often referred to as a “bull market.” On June 8, 2023, the Index closed at 4,293.93, 20.04% above its most recent low of 3,577.03 (which
occurred on October 12, 2022).
The U.S. economy has
been resilient, posting positive changes to GDP even as monetary policy tightened significantly. That said, there are also economic indicators that point to the potential for weakness over the coming quarters. The
Conference Board, a non-profit business membership and research group organization, reported that its Leading Economic Index, which is composed of 10 economic indicators whose changes tend to precede changes in the
overall economy, fell by 0.7% to a reading of 106.1 in June 2023, according to Reuters. The result represents the fifteenth consecutive monthly decline in the index, the longest streak of month-over-month decreases
since just before the financial crisis in 2007. From our perspective, even if the Fed can pull off a soft landing, it is likely to be a very bumpy ride.
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 Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust
Advisors L.P.
Fund Performance
Overview (Unaudited)
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
The First Trust
Alternative Absolute Return Strategy ETF (the “Fund”) seeks to provide investors with long-term total return. The shares of the Fund are listed and trade on The Nasdaq Stock Market LLC under the ticker
symbol “FAAR.” The Fund is an actively managed exchange-traded fund that seeks to achieve long-term total return through long and short investments in exchange-traded commodity futures contracts
(“Commodity Futures”) through a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The Fund does not invest directly in Commodity Futures.
The Fund gains exposure to these investments exclusively by investing in the Subsidiary. The Subsidiary is advised by First Trust Advisors L.P., the Fund’s investment advisor.
The Fund’s
investment in the Subsidiary is intended to provide the Fund with exposure to commodity markets within the limits of current federal income tax laws applicable to investment companies such as the Fund, which limit the
ability of investment companies to invest directly in Commodity Futures. The Subsidiary has the same investment objective as the Fund, but unlike the Fund, it may invest without limitation in Commodity Futures. The
Fund will invest up to 25% of its total assets in the Subsidiary.
The Subsidiary’s
holdings primarily consist of Commodity Futures, which are contractual agreements to buy or sell a particular commodity or financial instrument at a pre-determined price at a settlement date in the future. The Fund,
through the Subsidiary, engages in trading on commodity markets both inside and outside of the United States on behalf of the Fund. The Fund, through the Subsidiary, may invest in a range of Commodity Futures and
markets as determined by the Fund’s investment advisor from time to time. The remainder of the Fund’s assets will primarily be invested in: (1) U.S. government and agency securities with maturities of
two years or less; (2) short-term repurchase agreements; (3) money market instruments; and (4) cash.
| Performance
|
|
|
|
|
|
|
|
|
|
|
| Average Annual Total Returns
|
| Cumulative Total Returns
|
|
| 6 Months
Ended
6/30/23
| 1 Year
Ended
6/30/23
| 5 Years
Ended
6/30/23
| Inception
(5/18/16)
to 6/30/23
|
| 5 Years
Ended
6/30/23
| Inception
(5/18/16)
to 6/30/23
|
| Fund Performance
|
|
|
|
|
|
|
|
| NAV
| -4.35%
| -9.19%
| 3.03%
| 2.05%
|
| 16.12%
| 15.55%
|
| Market Price
| -4.51%
| -9.53%
| 2.99%
| 2.03%
|
| 15.90%
| 15.41%
|
| Index Performance
|
|
|
|
|
|
|
|
| 3 Month U.S. Treasury Bills + 3%
| 3.80%
| 6.75%
| 4.65%
| 4.44%
|
| 25.50%
| 36.27%
|
| Bloomberg Commodity Index
| -7.79%
| -9.61%
| 4.73%
| 3.93%
|
| 26.00%
| 31.61%
|
| S&P 500® Index
| 16.89%
| 19.59%
| 12.31%
| 13.58%
|
| 78.66%
| 147.52%
|
Total returns for the
period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual 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.
The 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 the Fund did not trade in the secondary market until after its inception, for the period from
inception to the first day of secondary market trading in shares of the Fund, the NAV of the 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 the Fund at NAV and Market Price, respectively.
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. 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 the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than
their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance
Overview (Unaudited) (Continued)
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
| Fund Allocation
| % of Net Assets
|
| U.S. Treasury Bills
| 53.3%
|
| Money Market Funds
| 22.5
|
| Net Other Assets and Liabilities*
| 24.2
|
| Total
| 100.0%
|
| *
| Includes variation margin on futures contracts.
|
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.
Portfolio Management
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
Semi-Annual Report
June 30, 2023
(Unaudited)
Advisor
First Trust Advisors L.P.
(“First Trust” or the “Advisor”) serves as the investment advisor, commodity pool operator and commodity trading advisor to the First Trust Alternative Absolute Return Strategy ETF (the
“Fund”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative
services necessary for the management of the Fund.
Portfolio Management
Team
John Gambla – CFA,
FRM, PRM, Senior Portfolio Manager, Alternatives Investment Team of First Trust
Rob A. Guttschow –
CFA, Senior Portfolio Manager, Alternatives Investment Team of First Trust
The portfolio managers
are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as a part of the portfolio management of the Fund since 2016.
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Understanding Your Fund
Expenses
June 30, 2023
(Unaudited)
As a shareholder of the
First Trust Alternative Absolute Return Strategy ETF (the “Fund”), 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 of investing in the Fund 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 June 30, 2023.
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 the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is
not the 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 Fund 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.
|
| Beginning
Account Value
January 1, 2023
| Ending
Account Value
June 30, 2023
| Annualized
Expense Ratio
Based on the
Six-Month
Period
| Expenses Paid
During the
Six-Month
Period (a)
|
| First Trust Alternative Absolute Return Strategy ETF (FAAR)
|
| Actual
| $1,000.00
| $956.50
| 0.95%
| $4.61
|
| Hypothetical (5% return before expenses)
| $1,000.00
| $1,020.08
| 0.95%
| $4.76
|
| (a)
| Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (January 1, 2023 through June
30, 2023), multiplied by 181/365 (to reflect the six-month period).
|
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Portfolio of
Investments
June 30, 2023
(Unaudited)
Principal
Value
|
| Description
|
| Stated
Coupon
|
| Stated
Maturity
|
| Value
|
| U.S. TREASURY BILLS – 53.3%
|
| $12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 07/06/23
|
| $11,995,058
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 08/10/23
|
| 11,935,052
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 09/14/23
|
| 11,874,537
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 10/12/23
|
| 11,825,565
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 11/09/23
|
| 11,777,188
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 11/16/23
|
| 11,765,400
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 12/07/23
|
| 11,727,692
|
| 12,000,000
|
| U.S. Treasury Bill
|
| (a)
|
| 12/14/23
|
| 11,714,731
|
|
|
| Total U.S. Treasury Bills
|
| 94,615,223
|
|
|
| (Cost $94,595,941)
|
|
|
|
|
|
|
| Shares
|
| Description
|
| Value
|
| MONEY MARKET FUNDS – 22.5%
|
| 16,000,000
|
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.00% (b)
|
| 16,000,000
|
| 24,000,000
|
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 4.94% (b)
|
| 24,000,000
|
|
|
| Total Money Market Funds
|
| 40,000,000
|
|
|
| (Cost $40,000,000)
|
|
|
|
| Total Investments – 75.8%
|
| 134,615,223
|
|
| (Cost $134,595,941)
|
|
|
|
| Net Other Assets and Liabilities – 24.2%
|
| 43,056,981
|
|
| Net Assets – 100.0%
|
| $177,672,204
|
The following futures
contracts of the Fund’s wholly-owned subsidiary were open at June 30, 2023 (see Note 2B - Futures Contracts in the Notes to Consolidated Financial Statements):
| Futures Contracts Long:
|
| Number
of
Contracts
|
| Notional
Value
|
| Expiration
Date
|
| Unrealized
Appreciation
(Depreciation)/
Value
|
| Corn Futures
|
| 225
|
| $5,565,938
|
| Dec–23
|
| $(669,068)
|
| Cotton No. 2 Futures
|
| 62
|
| 2,491,470
|
| Dec–23
|
| 73,876
|
| Gasoline RBOB Futures
|
| 40
|
| 4,137,000
|
| Aug–23
|
| 111,945
|
| Gasoline RBOB Futures
|
| 66
|
| 6,148,296
|
| Sep–23
|
| 54,198
|
| Gold 100 Oz. Futures
|
| 28
|
| 5,402,320
|
| Aug–23
|
| (301,180)
|
| Kansas City Hard Red Winter Wheat Futures
|
| 149
|
| 5,960,000
|
| Sep–23
|
| (269,301)
|
| LME Lead Futures
|
| 45
|
| 2,365,313
|
| Sep–23
|
| 6,044
|
| Silver Futures
|
| 47
|
| 5,409,700
|
| Sep–23
|
| (179,649)
|
| Soybean Oil Futures
|
| 116
|
| 7,790,850
|
| Nov–23
|
| 783,593
|
| Soybean Oil Futures
|
| 162
|
| 5,731,884
|
| Dec–23
|
| 351,348
|
| Sugar #11 (World) Futures
|
| 116
|
| 2,960,877
|
| Sep–23
|
| (21,641)
|
|
|
|
|
| $53,963,648
|
|
|
| $(59,835)
|
| Futures Contracts Short:
|
|
|
|
|
|
|
|
|
| Brent Crude Oil Futures
|
| 2
|
| $(150,820)
|
| Jul–23
|
| $(4,341)
|
| Cocoa Futures
|
| 195
|
| (6,538,350)
|
| Sep–23
|
| (405,671)
|
| Coffee “C” Futures
|
| 96
|
| (5,724,000)
|
| Sep–23
|
| 719,514
|
| Copper Futures
|
| 71
|
| (6,673,113)
|
| Sep–23
|
| (27,631)
|
| LME Aluminium Futures
|
| 73
|
| (3,919,188)
|
| Sep–23
|
| 363,178
|
| LME Nickel Futures
|
| 8
|
| (984,432)
|
| Sep–23
|
| 21,726
|
| LME Zinc Futures
|
| 72
|
| (4,300,650)
|
| Sep–23
|
| 66,000
|
| Low Sulphur Gasoil “G” Futures
|
| 18
|
| (1,264,500)
|
| Aug–23
|
| (16,556)
|
| Natural Gas Futures
|
| 207
|
| (5,791,860)
|
| Jul–23
|
| (788,877)
|
Page 6
See Notes to Consolidated Financial
Statements
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Portfolio of
Investments (Continued)
June 30, 2023
(Unaudited)
| Futures Contracts Short: (Continued)
|
| Number
of
Contracts
|
| Notional
Value
|
| Expiration
Date
|
| Unrealized
Appreciation
(Depreciation)/
Value
|
| NY Harbor ULSD Futures
|
| 18
|
| $(1,850,386)
|
| Jul–23
|
| $(64,113)
|
| Soybean Meal Futures
|
| 127
|
| (5,045,710)
|
| Dec–23
|
| (341,501)
|
| Wheat Futures
|
| 323
|
| (10,513,650)
|
| Sep–23
|
| (451,220)
|
|
|
|
|
| $(52,756,659)
|
|
|
| $(929,492)
|
|
|
| Total
|
| $1,206,989
|
|
|
| $(989,327)
|
| (a)
| Zero coupon bond.
|
| (b)
| Rate shown reflects yield as of June 30, 2023.
|
Valuation Inputs
A summary of the inputs
used to value the Fund’s investments as of June 30, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Consolidated Financial Statements):
| ASSETS TABLE
|
|
| Total
Value at
6/30/2023
| Level 1
Quoted
Prices
| Level 2
Significant
Observable
Inputs
| Level 3
Significant
Unobservable
Inputs
|
U.S. Treasury Bills
| $ 94,615,223
| $ —
| $ 94,615,223
| $ —
|
Money Market Funds
| 40,000,000
| 40,000,000
| —
| —
|
Total Investments
| 134,615,223
| 40,000,000
| 94,615,223
| —
|
Futures Contracts*
| 2,551,422
| 2,551,422
| —
| —
|
Total
| $ 137,166,645
| $ 42,551,422
| $ 94,615,223
| $—
|
|
|
| LIABILITIES TABLE
|
|
| Total
Value at
6/30/2023
| Level 1
Quoted
Prices
| Level 2
Significant
Observable
Inputs
| Level 3
Significant
Unobservable
Inputs
|
Futures Contracts*
| $ (3,540,749)
| $ (3,540,749)
| $ —
| $ —
|
| *
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is
presented on the Consolidated Statement of Assets and Liabilities.
|
See Notes to Consolidated Financial
Statements
Page 7
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Statement of
Assets and Liabilities
June 30, 2023
(Unaudited)
| ASSETS:
|
|
Investments, at value
| $ 134,615,223
|
Cash
| 39,154,855
|
Cash segregated as collateral for open futures contracts
| 5,648,950
|
| Receivables:
|
|
Dividends
| 339,053
|
Investment securities sold
| 281,741
|
Variation margin
| 188,725
|
Fund shares sold
| 423
|
Total Assets
| 180,228,970
|
| LIABILITIES:
|
|
Due to broker
| 722,290
|
| Payables:
|
|
Fund shares redeemed
| 1,690,871
|
Investment advisory fees
| 143,605
|
Total Liabilities
| 2,556,766
|
NET ASSETS
| $177,672,204
|
| NET ASSETS consist of:
|
|
Paid-in capital
| $ 185,603,574
|
Par value
| 63,000
|
Accumulated distributable earnings (loss)
| (7,994,370)
|
NET ASSETS
| $177,672,204
|
NET ASSET VALUE, per share
| $28.20
|
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)
| 6,300,002
|
Investments, at cost
| $134,595,941
|
Page 8
See Notes to Consolidated Financial
Statements
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Statement of
Operations
For the Six Months Ended
June 30, 2023 (Unaudited)
| INVESTMENT INCOME:
|
|
Interest
| $ 2,303,417
|
Dividends
| 2,021,626
|
Total investment income
| 4,325,043
|
| EXPENSES:
|
|
Investment advisory fees
| 917,001
|
Total expenses
| 917,001
|
NET INVESTMENT INCOME (LOSS)
| 3,408,042
|
| NET REALIZED AND UNREALIZED GAIN (LOSS):
|
|
| Net realized gain (loss) on:
|
|
Investments
| 1,204
|
Futures contracts
| (7,128,271)
|
Net realized gain (loss)
| (7,127,067)
|
| Net change in unrealized appreciation (depreciation) on:
|
|
Investments
| (3,437)
|
Futures contracts
| (4,611,228)
|
Net change in unrealized appreciation (depreciation)
| (4,614,665)
|
NET REALIZED AND UNREALIZED GAIN (LOSS)
| (11,741,732)
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
| $(8,333,690)
|
See Notes to Consolidated Financial
Statements
Page 9
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Statements of
Changes in Net Assets
|
| Six Months
Ended
6/30/2023
(Unaudited)
|
| Year
Ended
12/31/2022
|
| OPERATIONS:
|
|
|
|
Net investment income (loss)
| $ 3,408,042
|
| $ 1,091,223
|
Net realized gain (loss)
| (7,127,067)
|
| 5,370,123
|
Net change in unrealized appreciation (depreciation)
| (4,614,665)
|
| 3,444,705
|
Net increase (decrease) in net assets resulting from operations
| (8,333,690)
|
| 9,906,051
|
| DISTRIBUTIONS TO SHAREHOLDERS FROM:
|
|
|
|
Investment operations
| (2,499,721)
|
| (11,734,498)
|
| SHAREHOLDER TRANSACTIONS:
|
|
|
|
Proceeds from shares sold
| 4,428,780
|
| 104,591,601
|
Cost of shares redeemed
| (23,477,955)
|
| (12,976,045)
|
Net increase (decrease) in net assets resulting from shareholder transactions
| (19,049,175)
|
| 91,615,556
|
Total increase (decrease) in net assets
| (29,882,586)
|
| 89,787,109
|
| NET ASSETS:
|
|
|
|
Beginning of period
| 207,554,790
|
| 117,767,681
|
End of period
| $177,672,204
|
| $207,554,790
|
| CHANGES IN SHARES OUTSTANDING:
|
|
|
|
Shares outstanding, beginning of period
| 6,950,002
|
| 4,100,002
|
Shares sold
| 150,000
|
| 3,250,000
|
Shares redeemed
| (800,000)
|
| (400,000)
|
Shares outstanding, end of period
| 6,300,002
|
| 6,950,002
|
Page 10
See Notes to Consolidated Financial
Statements
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Financial
Highlights
For a share outstanding
throughout each period
|
| Six Months
Ended
6/30/2023
(Unaudited)
|
| Year Ended December 31,
|
|
| 2022
|
| 2021
|
| 2020
|
| 2019
|
| 2018
|
|
Net asset value, beginning of period
| $ 29.86
|
| $ 28.72
|
| $ 26.95
|
| $ 25.88
|
| $ 26.48
|
| $ 29.35
|
| Income from investment operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
| 0.52
|
| 0.20 (a)
|
| (0.28) (a)
|
| (0.18) (a)
|
| 0.36
|
| 0.14
|
Net realized and unrealized gain (loss)
| (1.79)
|
| 2.68
|
| 3.92
|
| 2.08
|
| (0.70)
|
| (2.86)
|
Total from investment operations
| (1.27)
|
| 2.88
|
| 3.64
|
| 1.90
|
| (0.34)
|
| (2.72)
|
| Distributions paid to shareholders from:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
| (0.39)
|
| (1.74)
|
| (1.87)
|
| (0.83)
|
| (0.26)
|
| (0.11)
|
Return of capital
| —
|
| —
|
| —
|
| —
|
| —
|
| (0.04)
|
Total distributions
| (0.39)
|
| (1.74)
|
| (1.87)
|
| (0.83)
|
| (0.26)
|
| (0.15)
|
Net asset value, end of period
| $28.20
|
| $29.86
|
| $28.72
|
| $26.95
|
| $25.88
|
| $26.48
|
Total return (b)
| (4.35)%
|
| 10.02%
|
| 13.49%
|
| 7.35%
|
| (1.27)%
|
| (9.23)%
|
| Ratios to average net assets/supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000’s)
| $ 177,672
|
| $ 207,555
|
| $ 117,768
|
| $ 59,298
|
| $ 25,879
|
| $ 18,534
|
Ratio of total expenses to average net assets
| 0.95% (c)
|
| 0.95%
|
| 0.95%
|
| 0.95%
|
| 0.95%
|
| 0.95%
|
Ratio of net investment income (loss) to average net assets
| 3.53% (c)
|
| 0.61%
|
| (0.95)%
|
| (0.68)%
|
| 0.88%
|
| 0.65%
|
Portfolio turnover rate (d)
| 0%
|
| 0%
|
| 0%
|
| 0%
|
| 0%
|
| 0%
|
| (a)
| Based on average shares outstanding.
|
| (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, derivatives and in-kind transactions.
|
See Notes to Consolidated Financial
Statements
Page 11
Notes to Consolidated Financial Statements
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
1. Organization
First Trust
Exchange-Traded Fund VII (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on November 6, 2012, and is registered with the Securities and Exchange
Commission (“SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust consists of two
funds that are offering shares. This report covers the First Trust Alternative Absolute Return Strategy ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “FAAR”
on The Nasdaq Stock Market LLC (“Nasdaq”) and commenced operations on May 18, 2016. Unlike conventional mutual funds, the 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 Fund is an actively
managed exchange-traded fund. The investment objective of the Fund seeks to provide investors with long-term total return. The Fund seeks to achieve long-term total return through long and short investments in
exchange-traded commodity futures contracts (“Commodity Futures”) through a wholly-owned subsidiary of the Fund, FT Cayman Subsidiary III, organized under the laws of the Cayman Islands (the
“Subsidiary”). The Fund does not invest directly in Commodity Futures. The Fund gains exposure to these investments exclusively by investing in the Subsidiary. The Fund will invest up to 25% of its total
assets in the Subsidiary. As of June 30, 2023, the Fund invested 19.47% of the Fund’s total assets in the Subsidiary. There can be no assurance that the Fund will achieve its investment objective. The Fund may
not be appropriate for all investors.
2. Significant
Accounting Policies
The Fund is considered an
investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The
consolidated financial statements include the accounts on a consolidated basis of the Subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The following is a summary of
significant accounting policies consistently followed by the Fund in the preparation of the consolidated financial statements. The preparation of the consolidated 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 consolidated
financial statements. Actual results could differ from those estimates.
A. Portfolio
Valuation
The 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. The Fund’s NAV is calculated 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 shares outstanding.
The Fund’s
investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as 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 Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the
“Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the
Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Consolidated Portfolio of Investments. The Fund’s investments are valued as follows:
Exchange-traded futures contracts are valued at the end of the day settlement price.
U.S.
Treasuries are fair valued on the basis of valuations provided by a third-party pricing service approved by the Trust’s Board of Trustees.
Shares
of open-end funds are valued based on NAV per share.
If the Fund’s
investments are not able to be priced by their pre-established pricing methods, such investments may be valued by the Trust’s Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair
value. A variety of factors may be considered in determining the fair value of such investments.
Valuing the Fund’s
holdings using fair value pricing will result in using prices for those holdings that may differ from current market valuations. The Subsidiary’s holdings will be valued in the same manner as the Fund’s
holdings.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
The Fund is 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:
| •
| 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.
|
| •
| 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.
|
| •
| 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 the Fund’s investments as of June
30, 2023, is included with the Fund’s Consolidated Portfolio of Investments.
B. Futures
Contracts
The Fund, through the
Subsidiary, may purchase and sell exchange-listed commodity contracts. When the Subsidiary purchases a listed futures contract, it agrees to purchase a specified reference asset (e.g., commodity) at a specified future
date. When the Subsidiary sells or shorts a listed futures contract, it agrees to sell a specified reference asset (e.g., commodity) at a specified future date. The price at which the purchase and sale will take place
is fixed when the Subsidiary enters into the contract. The exchange clearing corporation is the ultimate counterparty for all exchange-listed contracts, so credit risk is limited to the creditworthiness of the
exchange’s clearing corporation. Margin deposits are posted as collateral with the clearing broker and, in turn, with the exchange clearing corporation. Open futures contracts can be closed out prior to
settlement by entering into an offsetting transaction in a matching futures contract. If the Subsidiary is not able to enter into an offsetting transaction, the Subsidiary will continue to be required to maintain
margin deposits on the futures contract. When the contract is closed or expires, the Subsidiary records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Consolidated Statement of Operations.
Exchange-listed commodity
futures contracts are generally based upon commodities within the five principal commodity groups: energy, industrial metals, agriculture, precious metals, and livestock. The price of a commodity futures contract will
reflect the storage costs of purchasing the physical commodity. These storage costs include the time value of money invested in the physical commodity plus the actual costs of storing the commodity less any benefits
from ownership of the physical commodity that are not obtained by the holder of a futures contract (this is sometimes referred to as the “convenience yield”). To the extent that these storage costs change
for an underlying commodity while the Subsidiary is in a long position on that commodity, the value of the futures contract may change proportionately.
Upon entering into a
futures contract, the Subsidiary must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts
are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Consolidated Statement of Operations.
This daily fluctuation in value of the contracts is also known as variation margin and is included as “Variation margin” payable or receivable on the Consolidated Statement of Assets and Liabilities.
When the Subsidiary
purchases or sells a futures contract, the Subsidiary is required to collateralize its position in order to limit the risk associated with the use of leverage and other related risks. To collateralize its position,
the Subsidiary segregates assets consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the unrealized depreciation of the futures
contract or otherwise collateralize its position in a manner consistent with the 1940 Act or the 1940 Act Rules and SEC interpretations thereunder. As the Subsidiary continues to engage in the described securities
trading practices and properly segregates assets, the segregated assets will function as a practical limit on the amount of leverage which the Subsidiary may undertake and on the potential increase in the speculative
character of the Subsidiary’s outstanding portfolio investments.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
Additionally, such segregated assets
generally ensure the availability of adequate funds to meet the obligations of the Subsidiary arising from such investment activities.
C. Investment
Transactions and Investment Income
Investment transactions
are recorded as of the trade date. Realized gains and losses from investment 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. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
D. Cash
The Fund holds assets
equal to or greater than the full notional exposure of the futures contracts. These assets may consist of cash and other short-term securities to comply with SEC guidance with respect to coverage of futures contracts
by registered investment companies. At June 30, 2023, the Fund had restricted cash held of $5,648,950, which is included in “Cash segregated as collateral for open futures contracts” on the Consolidated
Statement of Assets and Liabilities.
E. Dividends and
Distributions to Shareholders
Dividends from net
investment income, if any, are declared and paid quarterly by the Fund. The Fund distributes its net realized capital gains, if any, to shareholders at least annually. The Fund may also designate a portion of the
amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may
be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net
investment income and realized capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the consolidated 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 portfolio securities held by
the Fund 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 consolidated financial statement
and tax purposes, will reverse at some time in the future.
The tax character of
distributions paid by the Fund during the fiscal year ended December 31, 2022, was as follows:
| Distributions paid from:
|
|
Ordinary income
| $11,734,498
|
Capital gains
| —
|
Return of capital
| —
|
As of December 31, 2022,
the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income
| $144,705
|
Accumulated capital and other gain (loss)
| (1,509,805)
|
Net unrealized appreciation (depreciation)
| 5,154,425
|
F. Income Taxes
The 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 (the “Code”), 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, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Subsidiary is
classified as a controlled foreign corporation under Subchapter N of the Code. Therefore, the Fund is required to increase its taxable income by its share of the Subsidiary’s income, whether or not such earnings
are distributed by the Subsidiary to the Fund. Net investment losses of the Subsidiary cannot be deducted by the Fund in the current period nor carried forward to offset taxable income in future periods.
The 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.
The Fund is subject to certain
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
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 December 31, 2022, for federal income tax purposes, the Fund had no
non-expiring capital loss carryforwards.
The Fund is 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, 2021,
and 2022 remain open to federal and state audit. As of June 30, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the
Fund’s consolidated financial statements for uncertain tax positions.
As of June 30, 2023, the
aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax
purposes were as follows:
| Tax Cost
|
| Gross
Unrealized
Appreciation
|
| Gross
Unrealized
(Depreciation)
|
| Net Unrealized
Appreciation
(Depreciation)
|
| $134,595,941
|
| $2,572,958
|
| $(3,543,003)
|
| $(970,045)
|
G. Expenses
Expenses, other than the
investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).
3. Investment
Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the
investment advisor to the Fund, 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 Fund’s and the Subsidiary’s investment portfolios, managing
the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s and the Subsidiary’s expenses, including
the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund
to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| Breakpoints
|
|
|
|
|
|
|
|
| Fund net assets up to and including $2.5 billion
| 0.95000%
|
|
|
|
|
|
|
| Fund net assets greater than $2.5 billion up to and including $5 billion
| 0.92625%
|
|
|
|
|
|
|
| Fund net assets greater than $5 billion up to and including $7.5 billion
| 0.90250%
|
|
|
|
|
|
|
| Fund net assets greater than $7.5 billion up to and including $10 billion
| 0.87875%
|
|
|
|
|
|
|
| Fund net assets greater than $10 billion
| 0.85500%
|
|
|
|
|
|
|
First Trust also provides
fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. The Subsidiary does not pay First Trust a separate management fee.
The Trust has multiple
service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BBH is responsible for custody of the Fund’s assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund’s investments and
cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund.
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 target outcome fund or an index fund.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
Additionally, the Lead
Independent Trustee and the Chairs 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
Chairs 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
The cost of purchases and
proceeds from sales of securities, excluding short-term investments, derivatives, and in-kind transactions, for the six months ended June 30, 2023, were $0 and $0, respectively.
For the six months ended
June 30, 2023, the Fund did not have any in-kind purchases or sales.
5. Derivative
Transactions
The following table
presents the types of derivatives held by the Subsidiary at June 30, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Consolidated Statement of Assets and
Liabilities.
|
|
|
|
| Asset Derivatives
|
| Liability Derivatives
|
Derivative
Instrument
|
| Risk
Exposure
|
| Consolidated
Statement of Assets and
Liabilities Location
|
| Value
|
| Consolidated
Statement of Assets and
Liabilities Location
|
| Value
|
| Futures contracts
|
| Commodity Risk
|
| Unrealized appreciation
on futures contracts*
|
| $ 2,551,422
|
| Unrealized depreciation
on futures contracts*
|
| $ 3,540,749
|
*Includes cumulative
appreciation/depreciation on futures contracts as reported in the Consolidated Portfolio of Investments. Only the current day’s variation margin is presented on the Consolidated Statement of Assets and
Liabilities.
The following table
presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the six months ended June 30, 2023, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
| Consolidated Statement of Operations Location
|
|
| Commodity Risk Exposure
|
|
| Net realized gain (loss) on futures contracts
| $(7,128,271)
|
| Net change in unrealized appreciation (depreciation) on futures contracts
| (4,611,228)
|
During the six months
ended June 30, 2023, the notional value of futures contracts opened and closed were $1,116,634,977 and $1,227,857,960, respectively.
The Fund does not have
the right to offset financial assets and liabilities related to futures contracts on the Consolidated Statement of Assets and Liabilities.
6. Creations,
Redemptions and Transaction Fees
The 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 the 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, the 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 the 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 the 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 the Fund’s shares and underlying
securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
The 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 the 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.
The 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 the 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 the 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.
7. 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 Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year
to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or to provide 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 Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before April 30, 2024.
8. Indemnification
The Trust, on behalf of
the Fund, 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.
9. Subsequent
Events
Management has evaluated
the impact of all subsequent events on the Fund through the date the consolidated financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the
consolidated financial statements that have not already been disclosed.
Additional Information
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(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 the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The 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. The 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 the Fund is available to investors within 60 days after the period to which it relates. The
Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
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.
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
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
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 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 has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance
that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an
alternative rate will have the same volume or liquidity. 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.
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
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. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. 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. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and
volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as
fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global
financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be
effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the
trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s
shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
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; capital controls; 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.
Preferred Securities
Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a
company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with
respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an
issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities,
including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency
and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd
lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be
less than the value at which such securities
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
have been held by the fund. Odd lots
often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to
the fund.
| NOT FDIC INSURED
| NOT BANK GUARANTEED
| MAY LOSE VALUE
|
Advisory Agreement
Board Considerations
Regarding Approval of Continuation of Investment Management Agreement
The Board of Trustees of
First Trust Exchange-Traded Fund VII (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Fund Agreement”) with
First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Alternative Absolute Return Strategy ETF (the “Fund”). The Board approved the continuation of the Fund Agreement for
a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. Because the Fund invests in exchange-traded commodity futures contracts through a wholly-owned subsidiary of the Fund (the
“Subsidiary”), the Board, including the Independent Trustees, also approved the continuation of an Investment Management Agreement (the “Subsidiary Agreement” and together with the Fund
Agreement, the “Agreements”) with the Advisor for the Subsidiary, also for a one-year period. The Board determined that the continuation of the Agreements 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, 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 17, 2023 and June 4–5, 2023, 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 the Fund and the Subsidiary (including the relevant personnel responsible for these services and their experience); the unitary fee rate
schedule payable by the 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 clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the
Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the 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 the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect 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 17, 2023, 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 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangements
between the Trust and the Advisor and between the Advisor and the Subsidiary continue to be reasonable business arrangements from the 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 the
Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the
Agreements, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreements. The Board considered that the Advisor is responsible for the overall management and
administration of the Trust, the Fund and the Subsidiary, and reviewed all of the services provided by the Advisor to the Fund and the Subsidiary, as well as the background and experience of the persons responsible
for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Alternatives Investment Team is responsible for the day-to-day management of the Fund’s and
the Subsidiary’s investments. The Board considered the background and experience of the members of the Alternatives Investment Team and noted the Board’s prior meetings with members of the
Team. The Board considered the Advisor’s statement that it applies the same oversight model internally with its Alternatives Investment Team as it uses for overseeing external sub-advisors, including
portfolio risk monitoring and performance review. 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 the Fund’s compliance with the 1940 Act, as well as the 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 Fund. Finally,
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
as part of the Board’s
consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 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 Fund 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, the Fund and the Subsidiary by the Advisor under the Agreements have been and are expected to remain satisfactory and that the
Advisor has managed the Fund consistent with its investment objective, policies and restrictions.
The Board considered the
unitary fee rate schedule payable by the Fund under the Fund Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the 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 Fund 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 noted
that the Advisor receives no compensation under the Subsidiary Agreement and pays the expenses of the Subsidiary. The Board received and reviewed information showing the fee rates and expense ratios of the peer
funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the 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 total (net) expense ratio for the Fund was below the median total (net)
expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and
discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including the limited number of actively-managed ETFs following an absolute return strategy and that the Expense Group
contained both actively-managed ETFs and open-end mutual funds, 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 Fund and other non-ETF clients that limited their comparability. In
considering the unitary fee rate schedule 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 the Fund and the other funds in the First Trust Fund Complex.
The Board considered
performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance
reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing
the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted
that the Fund underperformed the Performance Universe median for the one- and five-year periods ended December 31, 2022 and outperformed the Performance Universe median for the three-year period ended December 31,
2022. The Board also noted that the Fund outperformed the benchmark index for the one- and three-year periods ended December 31, 2022 and underperformed the benchmark index for the five-year period ended
December 31, 2022.
On the basis of all the
information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the 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 Fund at current asset levels and whether the Fund may benefit from any
economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain
thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor
continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit
the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate
level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology)
of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the 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 the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund.
The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the
Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board also considered the Advisor’s
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
June 30, 2023
(Unaudited)
compensation for fund reporting services
provided to the Fund pursuant to a separate Fund Reporting Services Agreement, which is paid from the unitary fee. The Board concluded that the character and amount of potential indirect 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 the 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 Fund 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 17, 2023
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 17, 2022 through the Liquidity Committee’s annual meeting held on March 23, 2023 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 Fund primarily holds assets that are
highly liquid investments, the Fund has not adopted any highly liquid investment minimum.
As stated in the written
report, during the review period, two funds breached the 15% limitation on illiquid investments for one day each, as a result of an unscheduled week-long closure of the stock exchange in Istanbul following devastating
earthquakes in February, causing all Turkish equities to be re-classified as “illiquid” for one day. Each fund filed a Form N-RN on the day after the breach occurred, and one day later after the breach was
cured. No fund with a highly liquid investment minimum breached that minimum during the reporting period. 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.
This page intentionally left blank
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite
400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman &
Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Items 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
| (a) | | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting
period is included as part of the report to shareholders filed under Item 1 of this form. |
Item 7. Disclosure of Proxy Voting Policies
and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End
Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by
Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote
of Security Holders.
There have been no material changes to the
procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes were implemented
after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407)
(as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. Controls and Procedures.
| (a) | | The registrant’s principal executive and principal financial officers, or persons performing
similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3 (c))) are effective, as of a date within 90
days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)). |
| (b) | | There were no changes in the registrant's internal control over financial reporting (as defined
in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End
Management Investment Companies.
Not applicable.
Item 13. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| (registrant) |
|
First Trust Exchange-Traded Fund VII |
| By (Signature and Title)* |
|
/s/ James M. Dykas |
| |
|
James M. Dykas, President and Chief Executive Officer
(principal executive
officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By (Signature and Title)* |
|
/s/ James M. Dykas |
| |
|
James M. Dykas, President and Chief Executive Officer
(principal executive
officer)
|
| By (Signature and Title)* |
|
/s/ Derek D. Maltbie |
| |
|
Derek D. Maltbie, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
|
* Print the name and title of each signing officer under
his or her signature.
Certification Pursuant to Rule 30a-2(a) under
the 1940 Act and Section 302
of the Sarbanes-Oxley Act
I, James M. Dykas, certify that:
| 1. | | I have reviewed this report on Form N-CSR of First Trust Exchange-Traded Fund VII; |
| 2. | | Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash
flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented
in this report; |
| 4. | | The registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal
control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
| (a) | | Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | | Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90
days prior to the filing date of this report based on such evaluation; and |
| (d) | | Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and |
| 5. | | The registrant’s other certifying officer(s) and I have disclosed to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | | All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize,
and report financial information; and |
| (b) | | Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
| Date: |
|
September 8, 2023 |
|
/s/ James M. Dykas |
|
| |
|
|
|
James M. Dykas, President and Chief Executive Officer
(principal executive officer) |
|
Certification Pursuant to Rule 30a-2(a) under
the 1940 Act and Section 302
of the Sarbanes-Oxley Act
I, Derek D. Maltbie, certify that:
| 1. | | I have reviewed this report on Form N-CSR of First Trust Exchange-Traded Fund VII; |
| 2. | | Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash
flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented
in this report; |
| 4. | | The registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal
control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
| (a) | | Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | | Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90
days prior to the filing date of this report based on such evaluation; and |
| (d) | | Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and |
| 5. | | The registrant’s other certifying officer(s) and I have disclosed to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | | All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize,
and report financial information; and |
| (b) | | Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
| Date: |
|
September 8, 2023 |
|
/s/ Derek D. Maltbie |
|
| |
|
|
|
Derek D. Maltbie, Treasurer, Chief Financial Officer
and
Chief Accounting Officer
(principal financial officer) |
|
Certification Pursuant to Rule 30a-2(b) under the
1940 Act and Section 906
of the Sarbanes-Oxley Act
I, James M. Dykas, President and Chief Executive Officer
of First Trust Exchange-Traded Fund VII (the “Registrant”), certify that:
| 1. | The Form N-CSR of the Registrant (the “Report”) fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant. |
| Date: |
|
September 8, 2023 |
|
/s/ James M. Dykas |
|
| |
|
|
|
James M. Dykas, President and Chief Executive Officer
(principal executive officer) |
|
I, Derek D. Maltbie, Treasurer, Chief Financial Officer
and Chief Accounting Officer of First Trust Exchange-Traded Fund VII (the “Registrant”), certify that:
| 1. | The Form N-CSR of the Registrant (the “Report”) fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant. |
| Date: |
|
September 8, 2023 |
|
/s/ Derek D. Maltbie |
|
| |
|
|
|
Derek D. Maltbie, Treasurer, Chief Financial Officer
and
Chief Accounting Officer
(principal financial officer) |
|
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