First Trust Exchange-Traded Fund VI (the "Trust") is a registered management
investment company that offers shares of First Trust NASDAQ Technology Dividend
Index Fund and Multi-Asset Diversified Income Index Fund (each, a "Fund" and
collectively, the "Funds"), each a separate exchange-traded index fund. First
Trust Advisors L.P. ("First Trust") is the investment advisor to each Fund.
The shares of each Fund ("Shares") are listed on The NASDAQ Stock Market
("NASDAQ(R)" or the "Exchange"). Market prices may differ to some degree from
the net asset value ("NAV") of the Shares. Unlike mutual funds, each Fund issues
and redeems Shares on a continuous basis, at NAV, only in large specified blocks
each consisting of 50,000 Shares (each such block of Shares, called a "Creation
Unit" and collectively, the "Creation Units"). Each Fund's Creation Units are
issued and redeemed in-kind for securities in which the Fund invests and/or
cash.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NET ASSET VALUE
Each Fund's NAV is determined as of the close of trading (normally 4:00 p.m.,
Eastern time) on each day the New York Stock Exchange is open for business. NAV
is calculated for a Fund by taking the market price of the Fund's total assets,
including interest or dividends accrued but not yet collected, less all
liabilities, and dividing such amount by the total number of Shares outstanding.
The result, rounded to the nearest cent, is the NAV per Share. All valuations
are subject to review by the Board or its delegate.
Each Fund's investments are valued at market value or, in the absence of market
value with respect to any portfolio securities, at fair value in accordance with
valuation procedures adopted by the Trust's Board of Trustees and in accordance
with the 1940 Act. Portfolio securities listed on any exchange other than
NASDAQ(R) and the London Stock Exchange Alternative Investment Market ("AIM")
are valued at the last sale price on the business day as of which such value is
being determined. Securities listed on the NASDAQ(R) or the AIM are valued at
the official closing price on the business day as of which such value is being
determined. If there has been no sale on such day, or no official closing price
in the case of securities traded on NASDAQ(R) or the AIM, the securities are
valued at the mean of the most recent bid and ask prices on such day. Portfolio
securities traded on more than one securities exchange are valued at the last
sale price or official closing price, as applicable, on the business day as of
which such value is being determined at the close of the exchange representing
the principal market for such securities. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on NASDAQ(R) and the
AIM, are valued at the closing bid prices. Short-term investments that mature in
less than 60 days when purchased are valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board or its delegate at fair
value. The use of fair value pricing by a Fund is governed by valuation
procedures adopted by the Board and in accordance with the provisions of the
1940 Act. These securities generally include, but are not limited to, restricted
securities (securities which may not be publicly sold without registration under
the Securities Act of 1933, as amended (the "Securities Act")) for which a
pricing service is unable to provide a market price; securities whose trading
has been formally suspended; a security whose market price is not available from
a pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of a Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by a Fund
generally results in the prices used by a Fund that may differ from the current
market quotations or official closing prices on the applicable exchange. A
variety of factors may be considered in determining the fair value of such
securities. See the SAI for details.
Valuing a Fund's securities using fair value pricing will result in using prices
for those securities that may differ from current market quotations or official
closing prices on the applicable exchange. Use of fair value prices and certain
current market quotations or official closing prices could result in a
difference between the prices used to calculate a Fund's NAV and the prices used
by its Index, which, in turn, could result in a difference between such Fund's
performance and the performance of its Index.
FUND SERVICE PROVIDERS
Brown Brothers Harriman & Co. is the administrator, custodian and fund
accounting and transfer agent for the Funds. Chapman and Cutler LLP, 111 West
Monroe Street, Chicago, Illinois 60603, serves as legal counsel to the Funds.
INDEX PROVIDERS
The applicable Index that each Fund seeks to track is compiled by NASDAQ(R), the
Index Provider. The Index Provider is not affiliated with the Funds, First Trust
or FTP. Each Fund is entitled to use the Index pursuant to a sublicensing
arrangement with First Trust, which in turn has a licensing agreement with the
Index Provider. The Index Provider or its agent also serves as calculation agent
for the Index (the "Index Calculation Agent"). The Index Calculation Agent is
responsible for the management of the day-to-day operations of the Index,
including calculating the value of the Index every 15 seconds, widely
disseminating the Index values every 15 seconds and tracking corporate actions,
some of which result in Index adjustments.
19
DISCLAIMERS
First Trust does not guarantee the accuracy and/or the completeness of the Index
or any data included therein, and First Trust shall have no liability for any
errors, omissions or interruptions therein. First Trust makes no warranty,
express or implied, as to results to be obtained by the Funds, owners of the
Shares of the Funds or any other person or entity from the use of the Indices or
any data included therein. First Trust makes no express or implied warranties,
and expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the Indices or any data included
therein. Without limiting any of the foregoing, in no event shall First Trust
have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits) arising out of matters relating to the use of
the Indices, even if notified of the possibility of such damages.
The Funds are not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group,
Inc. or its affiliates (NASDAQ OMX, with its affiliates, are referred to as the
"Corporations"). The Corporations have not passed on the legality or suitability
of, or the accuracy or adequacy of descriptions and disclosures relating to, the
Funds. The Corporations make no representation or warranty, express or implied
to the owners of the Fund or any member of the public regarding the advisability
of investing in securities generally or in the Funds particularly, or the
ability of the Funds to track general stock market performance. The
Corporations' only relationship to First Trust is in the licensing of the
NASDAQ(R), OMX(R), NASDAQ OMX(R), NASDAQ Technology Dividend IndexSM and NASDAQ
Multi-Asset Diversified Income IndexSM registered trademarks, trade names and
service marks of the Corporations and the use of the Indices which is
determined, composed and calculated by NASDAQ OMX without regard to Licensee or
the Funds. NASDAQ OMX has no obligation to take the needs of the Licensee or the
owners of the Funds into consideration in determining, composing or calculating
the Indices. The Corporations are not responsible for and have not participated
in the determination of the timing of, prices at, or quantities of the Funds to
be issued or in the determination or calculation of the equation by which a Fund
is to be converted into cash. The Corporations have no liability in connection
with the administration, marketing or trading of the Funds.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE INDICES OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE
FUNDs, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDICES OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY
LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INDEX INFORMATION
FIRST TRUST NASDAQ TECHNOLOGY DIVIDEND INDEX FUND
INDEX DESCRIPTION
The Index includes up to 100 Technology and Telecommunications companies that
pay a regular or common dividend. To be selected for the Index, a company must
be classified as a Technology or Telecommunications company under the Industry
Classification Benchmark ("ICB") and have a minimum market capitalization of
$500 million, as described below. The Index is calculated and maintained by the
Index Provider.
INDEX CALCULATION
The Index employs a modified market cap weighting methodology in which larger
companies receive a larger index weighting. The index weighting methodology
includes caps to prevent high concentrations among larger stocks. This
methodology is applied to the dividend value of each Index security. The
dividend value is calculated by multiplying dividends paid per share within the
past 12 months by the current shares outstanding. At each quarter, the Index is
rebalanced such that the Technology securities are given a collective weight of
80% and the Telecommunications securities are given a collective weight of 20%.
The maximum weight of any Technology constituent will not exceed 8%, and no more
than 5 securities are at that cap. The excess weight of any capped security is
distributed proportionally across the remaining Index Securities. If after
redistribution, any of the 5 highest ranked Index Securities are weighted below
8%, these securities are not capped. Any remaining Index Securities in excess of
4% are capped at 4%, and the excess weight will be redistributed proportionally
20
across the remaining Index Securities. The process is repeated, if necessary, to
derive the final weights. For the Telecommunications constituents, at each
quarterly rebalance no security weight will exceed 2%. The excess weight of any
capped security is distributed proportionally across the remaining
Telecommunications securities.
The Index began on June 20, 2012 at a base value of 1000.
ELIGIBILITY
Index eligibility is limited to specific security types only. The security types
eligible for the Index are common stocks and Depositary Receipts.
ELIGIBILITY CRITERIA
To be eligible for inclusion in the Index, a security must meet the following
criteria:
o be listed on The NASDAQ Stock Market, The New York Stock Exchange or
NYSE Amex;
o the issuer of the security must be classified as a Technology or
Telecommunications company under Industry Classification Benchmark
("ICB");
o have a minimum three-month average daily dollar trading volume of $1
million; codes 6000 and 9000;
o have a minimum market capitalization of $500 million;
o have paid a regular or common dividend within past 12 months;
o have a yield of at least .5%;
o have not had a decrease in common dividends per share paid within past
12 months;
o may not be issued by an issuer currently in bankruptcy proceedings;
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible; and
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn.
For the purposes of Index eligibility criteria, if the security is a depositary
receipt representing a security of a non-U.S. issuer, then references to the
"issuer" are references to the issuer of the underlying security.
INDEX EVALUATION
The Index securities are evaluated semi-annually in March and September. In the
evaluation, the above Eligibility Criteria are applied using market data through
the end of January and July. Securities meeting the criteria are included in the
Index. Security additions and deletions are made effective after the close of
trading on the third Friday in March and September.
Additionally, if at any time during the year other than the time of evaluation,
an Index security no longer meets the Eligibility Criteria, or is otherwise
determined to have become ineligible for inclusion in the Index, the security is
removed from the Index and is not replaced. Ordinarily, a security will be
removed from the Index at its Last Sale Price. If, however, at the time of its
removal the Index security is halted from trading on its primary listing market
and an official closing price cannot readily be determined, the Index security
may, in NASDAQ's discretion, be removed at a zero price. The zero price will be
applied to the Index security after the close of the market but prior to the
time the official closing value of the Index is disseminated, which is
ordinarily 17:16:00 ET.
INDEX MAINTENANCE
Changes in the price and/or Index Shares driven by corporate events such as
stock dividends, stock splits and certain spin-offs and rights issuances are
adjusted on the ex-date. If the change in total shares outstanding arising from
other corporate actions is greater than or equal to 10%, the change is made as
soon as practicable. Otherwise, if the change in total shares outstanding is
less than 10%, then all such changes are accumulated and made effective at one
time on a quarterly basis after the close of trading on the third Friday in each
of March, June, September and December. The Index Shares are derived from the
security's total shares outstanding. The Index Shares are adjusted by the same
percentage amount by which the total shares outstanding have changed.
A special cash dividend announced by the listing exchange, will result in an
adjustment to the Last Sale Price of an Index security prior to market open on
the ex-date for the special amount distributed. A special dividend may also be
referred to as unusual, extraordinary, one-time, non-recurring etc.
21
Ordinarily, whenever there is a change in Index Shares, a change in an Index
security or a change to the price of an Index security due to spin-off, rights
issuances or special cash dividends as mentioned above, the divisor is adjusted
to ensure that there is no discontinuity in the value of the Index which might
otherwise be caused by any such change. All changes are announced in advance and
are reflected in the Index prior to market open on the Index effective date.
INDEX REBALANCING
The Index employs a modified market capitalization weighting methodology. At
each Evaluation, the Index securities are classified Technology or
Telecommunications based on their ICB classification. The Technology securities
are given a collective weight of 80% and the Telecommunications securities are
given a collective weight of 20% in the Index.
Within the Technology Sector, the Index securities are ranked by dividend value.
At each quarter, the Index is rebalanced such that the maximum weight of any
Technology Index security does not exceed 8% and no more than 5 securities are
at the cap. The excess weight of any capped security is distributed
proportionally across the remaining Index securities in the Technology sector.
If after redistribution, any of the 5 highest ranked technology Index securities
are weighted below 8%, they are not capped. Next, any remaining Technology Index
securities in excess of 4% are capped at 4% and the excess weight is
redistributed proportionally across the remaining Technology Index securities.
The process is repeated, if necessary, to derive the final weights for the
Technology sector.
Within the Telecommunications sector, the Index securities are ranked by
dividend value. At each quarter, the Index is rebalanced such that the maximum
weight of any telecommunications security does not exceed 2%. The excess weight
of any capped security is distributed proportionally across the remaining Index
securities in the Telecommunications sector. The process is repeated, if
necessary, to derive the final weights for the Telecommunications sector.
The modified market capitalization-weighting methodology is applied to the
dividend value of each Index security. The dividend value is calculated by
multiplying dividends paid within he past 12 months by the current shares
outstanding. Index Shares are then calculated multiplying the weight of the
security derived above by the total dividend market value of the Index and
dividing the modified market capitalization for each Index security by its
corresponding Last Sale Price. The changes are effective after trading on the
third Friday in March, June, September and December.
NASDAQ OMX may, from time to time, exercise reasonable discretion as it deems
appropriate in order to ensure Index integrity.
MULTI-ASSET DIVERSIFIED INCOME INDEX FUND
INDEX DESCRIPTION
The Index is designed to provide exposure to five Index Segments, each selected
to result in a consistent and high yield for the Index. The Index is designed to
provide access to a diversified portfolio of small, mid and large capitalization
income producing securities, which are composed of domestic and international
dividend-paying stocks, REITs, oil and gas or basic materials MLPs, U.S.-listed
preferred securities and an index-based exchange-traded fund that invests in
high yield or "junk" bonds." The Index is comprised of securities classified as
U.S.-listed equities, U.S.-listed REITs, U.S.-listed preferred securities,
U.S.-listed MLPs and a high-yield corporate bond ETF.
The Index employs a modified market cap weighting methodology which assigns a
pre-set weight to the five Index Segments at each quarterly rebalance. Each
Index Segment has a set of separate and distinct eligibility rules and weighting
procedures as described below. The Index began on June 20, 2012 at a base value
of 1000.
INDEX CONSTRUCTION
The Index is comprised of the five types of securities listed above and selected
from each of these categories of securities as follows:
Dividend-Paying Equities
To be eligible for inclusion in the U.S.-listed equity segment of the Index, a
security must meet the following criteria:
o be a member of the NASDAQ(R) US Benchmark Index (NQUSB);
o not be classified as Real Estate Investment Trust (ICB: 8670) by the
Industry Classification Benchmark (ICB);
o have a minimum market capitalization of $1 billion;
o have a minimum three month average daily dollar trading value of $5
million;
o have paid a regular dividend for each of the last three consecutive
years;
22
o have positive total earnings over the trailing twelve month period;
o have a dividend payout ratio less than or equal to 80%; and
o have one year realized volatility less than the NQUSB one year
realized volatility + 15%.
Of the eligible companies, 50 securities will be selected and weighted by yield.
If less than 50 securities remain after the screens, securities will be added
back based on the volatility screen such that the securities which were next
eligible based on that screen will be added. If 50 securities are still not
eligible, the process will be repeated with each of the previous eligibility
criterion until 50 securities are achieved. Within the US Equity segment, no
single security can have a weight greater than 8%.
Dividend-paying equities comprise 25% of the Index.
REITs
To be eligible for inclusion in the U.S.-listed REIT segment of the Index, a
security must meet the following criteria:
o be a member of the NASDAQ(R) US Benchmark Index (NQUSB);
o must be classified as Real Estate Investment Trust (ICB: 8670) by the
Industry Classification Benchmark (ICB);
o have a minimum market capitalization of $1 billion;
o have a minimum three month average daily dollar trading value of $5
million;
o have paid a regular dividend for each of the last three consecutive
years;
o have positive total earnings over the trailing twelve month period;
o have a dividend payout ratio less than or equal to 150%; and
o have one year realized volatility less than the REIT segment of the
NQUSB one year realized volatility + 15%.
Of the eligible companies, 25 securities will be selected and weighted by yield.
If less than 25 securities remain after the screens, securities will be added
back based on the volatility screen such that the securities which were next
eligible based on that screen will be added. If 25 securities are still not
eligible, the process will be repeated with each of the previous eligibility
criterion until 25 securities are achieved. Within the U.S.-listed REIT segment,
no single security can have a weight greater than 8%.
REITs comprise 20% of the Index.
Preferred Securities
To be eligible for inclusion in the U.S.-listed preferred segment of the Index,
a security must meet the following criteria:
o be a member of the NASDAQ(R) US Preferred Security Index (NQPFDUS);
o have a minimum market capitalization of $250 million;
o have a minimum three month average daily dollar trading value of $250
thousand; and
o have one year realized volatility less than the NQPFDUS one year
realized volatility + 15%.
All components of the NQPFDUS classified as equity will be selected. If less
than 25 names exist, the remaining debt components will be selected based on the
following criteria. Each eligible component will be scored by yield and realized
volatility with the highest yielding security scoring 1 and least volatile
security a 1. The scores are added and the names with the lowest score are
selected. If two securities are tied in score, the security with the higher
yield will be selected. The 25 remaining U.S.-listed preferred securities are
then weighted by yield. No more than 40% of the US Preferred segment can be in
securities classified as debt based on the yield weighting. If the securities
classified as debt are greater than 50%, the weight will be capped at 40% and
excess weight will be redistributed to the remaining equity securities.
Preferred Securities comprise 20% of the Index.
MLPs
To be eligible for inclusion in the U.S.-listed MLP segment of the index, a
security must meet the following criteria:
o be classified as a limited partnership;
o be classified as Oil & Gas (0001) or Basic Materials (2000) by the
Industry Classification Benchmark (ICB);
o have a minimum market capitalization of $500 million;
23
o have a minimum three month average daily dollar trading value of $500
thousand: and
o have a one year realized volatility less than the SIG MLP Index one
year realized volatility + 15%.
Each eligible component will be scored by yield and realized volatility with the
highest yielding security scoring 1 and least volatile security a 1. The scores
are added and the 25 names with the lowest score are selected. If two securities
are tied in score, the security with the higher yield will be selected. If less
than 25 securities remain after the screens, securities will be added back based
on the volatility screen such that the securities which were next eligible based
on that screen will be added. If 25 securities are still not eligible, the
process will be repeated with each of the previous eligibility criterion until
25 securities are achieved. The 25 remaining U.S.-listed MLP securities are then
weighted by yield.
MLPs comprise 20% of the Index.
High Yield Bond ETF
To be eligible for inclusion in the high-yield corporate bond ETF segment of the
Index, a security must meet the following criteria:
o be a U.S.-listed ETF tracking a High Yield Corporate Bond Index
designed to provide a broad representation of the U.S.
dollar-denominated high yield corporate bond market; and
o have a minimum assets under management of $1 billion.
Each eligible ETF will be ranked by average dollar trading volume. The ETF with
the highest average daily dollar trading value will be selected.
The ETF will comprise 15% of the Index.
INDEX REBALANCING
The Index employs a modified market capitalization weighting methodology. At
each quarter the Index is rebalanced such that each segment of the Index will be
capped at its predetermined weight (the preferred segment of the NASDAQ(R) US
Multi-Asset Income Index ("NQMAUS") is reviewed on an annual basis in June of
each year). Rebalancing is effective as of the market close of the third Friday
in March, June, September and December. The reference dates for the data used in
the rebalancing are at the close of trading on the last trading day in January,
April, July and October, respectively.
Additionally, if at any time during the year other than the rebalancing, an
Index security no longer meets the Eligibility Criteria, or is otherwise
determined to have become ineligible for inclusion in the Index, the security is
removed from the Index and is not replaced. Ordinarily, a security will be
removed from the Index at its Last Sale Price. If, however, at the time of its
removal the Index security is halted from trading on its primary listing market
and an official closing price cannot readily be determined, the Index security
may, in NASDAQ(R)'s discretion, be removed at a zero price. The zero price will
be applied to the Index security after the close of the market but prior to the
time the official closing value of the Index is disseminated, which is
ordinarily 17:16:00 ET.
PREMIUM/DISCOUNT INFORMATION
The tables that follow present information about the differences between each
Fund's daily market price on the applicable Exchange and its NAV. The "Market
Price" of a Fund generally is determined using the midpoint between the highest
bid and lowest offer on the Exchange, as of the time a Fund's NAV is calculated.
A Fund's Market Price may be at, above, or below its NAV. The NAV of a Fund will
fluctuate with changes in the market value of its portfolio holdings. The Market
Price of a Fund will fluctuate in accordance with changes in its NAV, as well as
market supply and demand.
Premiums or discounts are the differences (generally expressed as a percentage)
between the NAV and Market Price of a Fund on a given day, generally at the time
NAV is calculated. A premium is the amount that a Fund is trading above the
reported NAV. A discount is the amount that a Fund is trading below the reported
NAV.
The following information shows the frequency distribution of premiums and
discounts of the daily bid/ask price of each Fund against each Fund's NAV. The
information shown for each Fund is for the period indicated. Shareholders may
pay more than NAV when they buy Fund Shares and receive less than NAV when they
sell those Shares because Shares are bought and sold at current market price.
All data presented here represents past performance, which cannot be used to
predict future results. Information about the premiums and discounts at which
the Funds' Shares have traded is available on the Funds' website at
www.ftportfolios.com.
24
First Trust NASDAQ Technology Dividend Index Fund
Bid/Ask Midpoint vs. NAV
Number of Days Bid/Ask Midpoint At/Above NAV
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
For the Period 8/14/12 - 12/31/12* 91 0 0 0
Number of Days Bid/Ask Midpoint Below NAV
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
For the Period 8/14/12 - 12/31/12* 3 1 0 0
Multi-Asset Diversified Income Index Fund
Bid/Ask Midpoint vs. NAV
Number of Days Bid/Ask Midpoint At/Above NAV
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
For the Period 8/14/12 - 12/31/12* 88 0 0 0
Number of Days Bid/Ask Midpoint Below NAV
0.00% - 0.49% 0.50% - 0.99% 1.00% - 1.99% >= 2.00%
For the Period 8/14/12 - 12/31/12* 6 1 0 0
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* Trading commenced on August 14, 2012
TOTAL RETURN INFORMATION
The tables below compare the total return of each Fund to the total return of
the Index on which it is based and each Fund's benchmark indices. The
information presented for each Fund is for the period indicated. The total
returns would have been lower if certain fees had not been waived and expenses
reimbursed by First Trust.
"Average annual total returns" represent the average annual change in the value
of an investment over the period indicated. "Cumulative total returns" represent
the total change in value of an investment over the period indicated. The NAV
per Share of a Fund is the value of one Share of a Fund and is computed by
dividing the value of all assets of the Fund (including accrued interest and
dividends), less liabilities (including accrued expenses and dividends declared
but unpaid), by the total number of outstanding Shares. The NAV return is based
on the NAV per Share of a Fund, and the market return is based on the market
price per Share of a Fund. The price used to calculate market return ("Market
Price") generally is determined by using the midpoint between the highest bid
and the lowest offer on the Exchange on which the Shares of a Fund are listed
for trading, as of the time that a Fund's NAV is calculated. Since the Shares of
each Fund typically do not trade in the secondary market until several days
after a Fund's inception, for the period from inception to the first day of
secondary market trading in Shares of a Fund, the NAV of a Fund is used as a
proxy for the secondary market trading price to calculate market returns. Market
and NAV returns assume that dividends and capital gain distributions have been
reinvested in a Fund at Market Price and NAV, respectively. An Index is a
statistical composite that tracks a specified financial market or sector. Unlike
each Fund, an Index does not actually hold a portfolio of securities and
therefore does not incur the expenses incurred by a Fund. These expenses
negatively impact the performance of each Fund. Also, market returns do not
include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns reflect the reinvestment of dividends on securities in
the Indices. The returns shown in the table below do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Shares of a Fund. The investment return and principal value of Shares of
a Fund will vary with changes in market conditions. Shares of a Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. A Fund's past performance is no guarantee of future results.
25
First Trust NASDAQ Technology Dividend Index Fund
Cumulative Total Returns
Inception (8/13/12)
to 9/30/12
FUND PERFORMANCE
NAV -0.72%
Market Price -0.67%
INDEX PERFORMANCE
NASDAQ Technology Dividend Index -0.65%
S&P 500(R) Index 2.90%
S&P 500 Information Technology Index 2.47%
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Multi-Asset Diversified Income Index Fund
Cumulative Total Returns
Inception (8/13/12)
to 9/30/12
FUND PERFORMANCE
NAV 1.18%
Market Price 1.23%
INDEX PERFORMANCE
NASDAQ Multi-Asset Diversified Income Index 1.32%
S&P 500(R) Index 2.90%
Dow Jones Select Dividend Index(sm) 1.34%
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STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-22717
FIRST TRUST EXCHANGE-TRADED FUND VI
TICKER
FUND NAME SYMBOL EXCHANGE
FIRST TRUST NASDAQ TECHNOLOGY DIVIDEND INDEX FUND TDIV The NASDAQ(R) Stock Market
MULTI-ASSET DIVERSIFIED INCOME INDEX FUND MDIV The NASDAQ(R) Stock Market
|
DATED JANUARY 31, 2013
This Statement of Additional Information ("SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated January 31, 2013 for
First Trust NASDAQ Technology Dividend Index Fund and Multi-Asset Diversified
Income Index Fund (each, a "Fund" and collectively, the "Funds"), each a series
of the First Trust Exchange-Traded Fund VI (the "Trust"), as it may be revised
from time to time (the "Prospectus"). Capitalized terms used herein that are not
defined have the same meaning as in the Prospectus, unless otherwise noted. A
copy of the Prospectus may be obtained without charge by writing to the Trust's
distributor, First Trust Portfolios L.P., 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187, or by calling toll free at (800) 621-1675.
The audited financial statements for the Funds' most recent fiscal year
appear in the Funds' Annual Report to Shareholders dated September 30, 2012,
which was filed with the Securities and Exchange Commission ("SEC") on December
7, 2012. The financial statements from such Annual Report are incorporated
herein by reference. The Annual Report is available without charge by calling
(800) 621-1675 or by visiting the SEC's website at http://www.sec.gov.
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS.................................1
EXCHANGE LISTING AND TRADING...................................................3
INVESTMENT OBJECTIVEs AND POLICIES.............................................4
INVESTMENT STRATEGIES..........................................................6
SUBLICENSE AGREEMENTS.........................................................18
INVESTMENT RISKS..............................................................18
MANAGEMENT OF THE FUNDS.......................................................23
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE......................................36
BROKERAGE ALLOCATIONS.........................................................36
CUSTODIAN, TRANSFER AGENT, FUND ACCOUNTING AGENT, DISTRIBUTOR, INDEX
PROVIDER AND EXCHANGE....................................................39
ADDITIONAL INFORMATION........................................................41
PROXY VOTING POLICIES AND PROCEDURES..........................................43
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS.........................44
FEDERAL TAX MATTERS...........................................................52
DETERMINATION OF NAV..........................................................58
DIVIDENDS AND DISTRIBUTIONS...................................................60
MISCELLANEOUS INFORMATION.....................................................61
FINANCIAL STATEMENTS..........................................................61
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GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS
The Trust was organized as a Massachusetts business trust on June 4, 2012
and is authorized to issue an unlimited number of shares in one or more series
or "Funds." The Trust is an open-end management investment company, registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust
currently offers shares in two series, the First Trust NASDAQ Technology
Dividend Index Fund, a non-diversified series, and the Multi-Asset Diversified
Income Index Fund, a diversified series.
This SAI relates to the Funds. The shares of the Funds are referred to
herein as "Shares" or "Fund Shares." Each Fund, as a series of the Trust,
represents a beneficial interest in a separate portfolio of securities and other
assets, with its own objective and policies.
The Board of Trustees of the Trust (the "Board of Trustees" or the
"Trustees") has the right to establish additional series in the future, to
determine the preferences, voting powers, rights and privileges thereof and to
modify such preferences, voting powers, rights and privileges without
shareholder approval. Shares of any series may also be divided into one or more
classes at the discretion of the Trustees.
The Trust or any series or class thereof may be terminated at any time by
the Board of Trustees upon written notice to the shareholders.
Each Share has one vote with respect to matters upon which a shareholder
vote is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all series of the Trust vote together as a
single class except as otherwise required by the 1940 Act, or if the matter
being voted on affects only a particular series, and, if a matter affects a
particular series differently from other series, the Shares of that series will
vote separately on such matter. The Trust's Declaration of Trust (the
"Declaration") requires a shareholder vote only on those matters where the 1940
Act requires a vote of shareholders and otherwise permits the Trustees to take
actions without seeking the consent of shareholders. For example, the
Declaration gives the Trustees broad authority to approve reorganizations
between a Fund and another entity, such as another exchange-traded fund, or the
sale of all or substantially all of a Fund's assets, or the termination of the
Trust or a Fund without shareholder approval if the 1940 Act would not require
such approval.
The Declaration provides that by becoming a shareholder of a Fund, each
shareholder shall be expressly held to have agreed to be bound by the provisions
of the Declaration. The Declaration may, except in limited circumstances, be
amended by the Trustees in any respect without a shareholder vote. The
Declaration provides that the Trustees may establish the number of Trustees and
that vacancies on the Board of Trustees may be filled by the remaining Trustees,
except when election of Trustees by the shareholders is required under the 1940
Act. Trustees are then elected by a plurality of votes cast by shareholders at a
meeting at which a quorum is present. The Declaration also provides that
Trustees may be removed, with or without cause, by a vote of shareholders
holding at least two-thirds of the voting power of the Trust, or by a vote of
two-thirds of the remaining Trustees. The provisions of the Declaration relating
to the election and removal of Trustees may not be amended without the approval
of two-thirds of the Trustees.
The holders of Fund Shares are required to disclose information on direct
or indirect ownership of Fund Shares as may be required to comply with various
laws applicable to the Funds or as the Trustees may determine, and ownership of
Fund Shares may be disclosed by the Funds if so required by law or regulation.
In addition, pursuant to the Declaration, the Trustees may, in their discretion,
require the Trust to redeem Shares held by any shareholder for any reason under
terms set by the Trustees. The Declaration provides a detailed process for the
bringing of derivative actions by shareholders in order to permit legitimate
inquiries and claims while avoiding the time, expense, distraction and other
harm that can be caused to a Fund or its shareholders as a result of spurious
shareholder demands and derivative actions. Prior to bringing a derivative
action, a demand must first be made on the Trustees. The Declaration details
various information, certifications, undertakings and acknowledgements that must
be included in the demand. Following receipt of the demand, the Trustees have a
period of 90 days, which may be extended by an additional 60 days, to consider
the demand. If a majority of the Trustees who are considered independent for the
purposes of considering the demand determine that maintaining the suit would not
be in the best interests of a Fund, the Trustees are required to reject the
demand and the complaining shareholder may not proceed with the derivative
action unless the shareholder is able to sustain the burden of proof to a court
that the decision of the Trustees not to pursue the requested action was not a
good faith exercise of their business judgment on behalf of a Fund. In making
such a determination, a Trustee is not considered to have a personal financial
interest by virtue of being compensated for his or her services as a Trustee. If
a demand is rejected, the complaining shareholder will be responsible for the
costs and expenses (including attorneys' fees) incurred by a Fund in connection
with the consideration of the demand under a number of circumstances. If a
derivative action is brought in violation of the Declaration, the shareholder
bringing the action may be responsible for a Fund's costs, including attorneys'
fees. The Declaration also provides that any shareholder bringing an action
against a Fund waives the right to trial by jury to the fullest extent permitted
by law.
The Trust is not required to and does not intend to hold annual meetings
of shareholders.
Under Massachusetts law applicable to Massachusetts business trusts,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees. The Declaration further provides for indemnification out of the assets
and property of the Trust for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust or a Fund itself was unable to meet its obligations.
The Declaration further provides that a Trustee acting in his or her
capacity as Trustee is not personally liable to any person other than the Trust
or its shareholders, for any act, omission, or obligation of the Trust. The
Declaration requires the Trust to indemnify any persons who are or who have been
Trustees, officers or employees of the Trust for any liability for actions or
failure to act except to the extent prohibited by applicable federal law. In
making any determination as to whether any person is entitled to the advancement
- 2 -
of expenses in connection with a claim for which indemnification is sought, such
person is entitled to a rebuttable presumption that he or she did not engage in
conduct for which indemnification is not available. The Declaration provides
that any Trustee who serves as chair of the Board of Trustees or of a committee
of the Board of Trustees, lead independent Trustee, or audit committee financial
expert, or in any other similar capacity will not be subject to any greater
standard of care or liability because of such position.
The Funds are advised by First Trust Advisors L.P. (the "Advisor" or
"First Trust").
The Funds list and trade their Shares on The NASDAQ(R) Stock Market
("NASDAQ(R)"). The Shares will trade on NASDAQ(R) at market prices that may be
below, at or above net asset value ("NAV"). The Funds offer and issue Shares at
NAV only in aggregations of a specified number of Shares (each a "Creation Unit"
or a "Creation Unit Aggregation"), generally in exchange for a basket of equity
securities (the "Deposit Securities") included in each Fund's corresponding
Index (as hereinafter defined), together with the deposit of a specified cash
payment (the "Cash Component"). Creation Units are aggregations of 50,000 Shares
of a Fund.
The Trust reserves the right to permit creations and redemptions of Fund
Shares to be made in whole or in part on a cash basis under certain
circumstances. Fund Shares may be issued in advance of receipt of Deposit
Securities subject to various conditions including a requirement to maintain on
deposit with the applicable Fund cash at least equal to 115% of the market value
of the missing Deposit Securities. See the "Creation and Redemption of Creation
Unit Aggregations" section. In each instance of such cash creations or
redemptions, transaction fees may be imposed that will be higher than the
transaction fees associated with in-kind creations or redemptions. In all cases,
such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of NASDAQ(R) necessary to
maintain the listing of Shares of a Fund will continue to be met. NASDAQ(R) may,
but is not required to, remove the Shares of a Fund from listing if (i)
following the initial 12-month period beginning at the commencement of trading
of a Fund, there are fewer than 50 beneficial owners of the Shares of such Fund
for 30 or more consecutive trading days; (ii) the value of such Fund's Index (as
defined below) is no longer calculated or available; or (iii) such other event
shall occur or condition exist that, in the opinion of NASDAQ(R) makes further
dealings on NASDAQ(R) inadvisable. NASDAQ(R) will remove the Shares of a Fund
from listing and trading upon termination of such Fund.
As in the case of other stocks traded on NASDAQ(R), brokers' commissions
on transactions will be based on negotiated commission rates at customary
levels.
The Funds reserve the right to adjust the price levels of Shares in the
future to help maintain convenient trading ranges for investors. Any adjustments
- 3 -
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of each Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus describes the investment objectives and certain policies of
the Funds. The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of the Funds.
Each Fund is subject to the following fundamental policies, which may not
be changed without approval of the holders of a majority of the outstanding
voting securities of the Fund:
(1) A Fund may not issue senior securities, except as permitted
under the 1940 Act.
(2) A Fund may not borrow money, except that a Fund may (i) borrow
money from banks for temporary or emergency purposes (but not for leverage
or the purchase of investments) and (ii) engage in other transactions
permissible under the 1940 Act that may involve a borrowing (such as
obtaining short-term credits as are necessary for the clearance of
transactions, engaging in delayed-delivery transactions, or purchasing
certain futures, forward contracts and options), provided that the
combination of (i) and (ii) shall not exceed 33-1/3% of the value of a
Fund's total assets (including the amount borrowed), less a Fund's
liabilities (other than borrowings).
(3) A Fund will not underwrite the securities of other issuers
except to the extent the Fund may be considered an underwriter under the
Securities Act of 1933, as amended (the "1933 Act"), in connection with
the purchase and sale of portfolio securities.
(4) A Fund will not purchase or sell real estate or interests
therein, unless acquired as a result of ownership of securities or other
instruments (but this shall not prohibit a Fund from purchasing or selling
securities or other instruments backed by real estate or of issuers
engaged in real estate activities).
(5) A Fund may not make loans to other persons, except through (i)
the purchase of debt securities permissible under a Fund's investment
policies, (ii) repurchase agreements, or (iii) the lending of portfolio
securities, provided that no such loan of portfolio securities may be made
by a Fund if, as a result, the aggregate of such loans would exceed
33-1/3% of the value of a Fund's total assets.
(6) A Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments (but
this shall not prevent a Fund from purchasing or selling options, futures
contracts, forward contracts or other derivative instruments, or from
investing in securities or other instruments backed by physical
commodities).
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(7) A Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry or group of
industries, except to the extent that the Index that a Fund is based upon
concentrates in an industry or a group of industries. Accordingly the
First Trust NASDAQ Technology Dividend Index Fund will be concentrated in
securities of technology companies. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
(8) With respect to 75% of its total assets, the Multi-Asset
Diversified Income Index Fund may not purchase the securities of any
issuer (except securities of other investment companies or securities
issued or guaranteed by the United States government or any agency or
instrumentality thereof) if, as a result, (i) more than 5% of the Fund's
total assets would be invested in securities of that issuer, or (ii) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
Except for restriction (2), if a percentage restriction is adhered to at
the time of investment, a later increase in percentage resulting from a change
in market value of the investment or the total assets will not constitute a
violation of that restriction.
For purposes of applying restriction (1) above, under the 1940 Act as
currently in effect, a Fund is not permitted to issue senior securities, except
that a Fund may borrow from any bank if immediately after such borrowing the
value of such Fund's total assets is at least 300% of the principal amount of
all of the Fund's borrowings (i.e., the principal amount of the borrowings may
not exceed 33 1/3% of the Fund's total assets). In the event that such asset
coverage shall at any time fall below 300% the applicable Fund shall, within
three days thereafter (not including Sundays and holidays), reduce the amount of
its borrowings to an extent that the asset coverage of such borrowing shall be
at least 300%. The fundamental investment limitations set forth above limit a
Fund's ability to engage in certain investment practices and purchase securities
or other instruments to the extent permitted by, or consistent with, applicable
law. As such, these limitations will change as the statute, rules, regulations
or orders (or, if applicable, interpretations) change, and no shareholder vote
will be required or sought.
The foregoing fundamental policies of each Fund may not be changed without
the affirmative vote of the majority of the outstanding voting securities of the
respective Fund. The 1940 Act defines a majority vote as the vote of the lesser
of (i) 67% or more of the voting securities represented at a meeting at which
more than 50% of the outstanding securities are represented; or (ii) more than
50% of the outstanding voting securities. With respect to the submission of a
change in an investment policy to the holders of outstanding voting securities
of a Fund, such matter shall be deemed to have been effectively acted upon with
respect to a Fund if a majority of the outstanding voting securities of a Fund
vote for the approval of such matter, notwithstanding that such matter has not
been approved by the holders of a majority of the outstanding voting securities
of any other series of the Trust affected by such matter.
In addition to the foregoing fundamental policies, the Funds are also
subject to strategies and policies discussed herein which, unless otherwise
noted, are non-fundamental restrictions and policies and may be changed by the
Board of Trustees.
- 5 -
INVESTMENT STRATEGIES
Under normal circumstances, the First Trust NASDAQ Technology Dividend
Index Fund will invest at least 90% of its net assets (plus any borrowing for
investment purposes) in common stocks and depositary receipts that may include
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") or other depositary receipts (collectively
"Depositary Receipts") in the NASDAQ Technology Dividend Index (an "Index").
Under normal circumstances, the Multi-Asset Diversified Income Index Fund
will invest at least 90% of its net assets (plus any borrowing for investment
purposes) in common stocks, Depositary Receipts, real estate investment trusts
("REITs"), preferred securities, master limited partnerships ("MLPs") and an
exchange-traded fund ("ETF"), each of which represents the securities in the
NASDAQ Multi-Asset Diversified Income Index (an "Index").
Fund shareholders are entitled to 60 days' notice prior to any change in
these non-fundamental investment policies.
TYPES OF INVESTMENTS
High Yield Securities: The Multi-Asset Diversified Income Index Fund will
invest in securities that are rated below-investment grade at the time of
purchase. The ratings of a rating agency represent its opinion as to the quality
of securities it undertakes to rate. Ratings are not absolute standards of
quality; consequently, securities with the same maturity, duration, coupon, and
rating may have different yields. If a security owned by the Fund is
subsequently downgraded, the Fund will not be required to dispose of such
security.
Warrants: The Funds may invest in warrants. Warrants acquired by a Fund
entitle it to buy common stock from the issuer at a specified price and time.
They do not represent ownership of the securities but only the right to buy
them. Warrants are subject to the same market risks as stocks, but may be more
volatile in price. A Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration date.
Delayed-Delivery Transactions: The Funds may from time to time purchase
securities on a "when-issued" or other delayed-delivery basis. The price of
securities purchased in such transactions is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. During the period between the purchase and settlement, a Fund does
not remit payment to the issuer, no interest is accrued on debt securities, and
dividend income is not earned on equity securities. Delayed-delivery commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of a decline
in value of a Fund's other assets. While securities purchased in
delayed-delivery transactions may be sold prior to the settlement date, the
Funds intend to purchase such securities with the purpose of actually acquiring
them. At the time a Fund makes the commitment to purchase a security in a
delayed-delivery transaction, it will record the transaction and reflect the
value of the security in determining its NAV.
- 6 -
The Funds will earmark or maintain in a segregated account cash, U.S.
government securities, and high-grade liquid debt securities equal in value to
commitments for delayed-delivery securities. Such earmarked or segregated
securities will mature or, if necessary, be sold on or before the settlement
date. When the time comes to pay for delayed-delivery securities, a Fund will
meet its obligations from then-available cash flow, sale of the securities
earmarked or held in the segregated account described above, sale of other
securities, or, although it would not normally expect to do so, from the sale of
the delayed-delivery securities themselves (which may have a market value
greater or less than a Fund's payment obligation).
Although the Prospectus and this SAI describe certain permitted methods of
segregating assets or otherwise "covering" certain transactions, a Fund may
segregate against or cover such transactions using other methods permitted under
the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC
thereunder. For these purposes, interpretations and guidance provided by the SEC
staff may be taken into account when deemed appropriate by a Fund.
Illiquid Securities: The Funds may invest in illiquid securities (i.e.,
securities that are not readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to, certain restricted
securities (securities the disposition of which is restricted under the federal
securities laws), securities that may only be resold pursuant to Rule 144A under
the 1933 Act that are deemed to be illiquid; and repurchase agreements with
maturities in excess of seven days. However, a Fund will not acquire illiquid
securities if, as a result, such securities would comprise more than 15% of the
value of a Fund's net assets. The Board of Trustees or its delegate has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are liquid or illiquid for purposes of this
15% limitation. The Board of Trustees has delegated to First Trust the
day-to-day determination of the illiquidity of any equity or fixed-income
security, although it has retained oversight for such determinations. With
respect to Rule 144A securities, First Trust considers factors such as (i) the
nature of the market for a security (including the institutional private resale
market, the frequency of trades and quotes for the security, the number of
dealers willing to purchase or sell the security, the amount of time normally
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand instruments), and (iii) other
permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the 1933 Act. Where registration is required, a
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time a Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than that which prevailed when it
decided to sell. Illiquid securities will be priced at fair value as determined
in good faith under procedures adopted by the Board of Trustees. If, through the
appreciation of illiquid securities or the depreciation of liquid securities, a
Fund should be in a position where more than 15% of the value of its net assets
- 7 -
are invested in illiquid securities, including restricted securities which are
not readily marketable, a Fund will take such steps as is deemed advisable, if
any, to protect liquidity.
Money Market Funds: The Funds may invest in shares of money market funds
to the extent permitted by the 1940 Act.
Non-U.S. Investments: Non-U.S. securities include securities issued or
guaranteed by companies organized under the laws of countries other than the
United States (including emerging markets), securities issued or guaranteed by
foreign, national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities and debt obligations of
supranational governmental entities such as the World Bank or European Union.
Non-U.S. securities also include U.S. dollar-denominated debt obligations, such
as "Yankee Dollar" obligations, of foreign issuers and of supra-national
government entities. Yankee Dollar obligations are U.S. dollar-denominated
obligations issued in the U.S. capital markets by foreign corporations, banks
and governments. Foreign securities also may be traded on foreign securities
exchanges or in over-the-counter capital markets.
Certain of a Fund's investment in foreign securities may be denominated in
currencies other than the U.S. dollar. To the extent a Fund invests in such
instruments, the value of the assets of the Fund as measured in U.S. dollars
will be affected by changes in exchange rates. Generally, a Fund's currency
exchange transactions will be conducted on a spot (i.e., cash) basis at the spot
rate prevailing in the currency exchange market. The cost of a Fund's currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold. In order to protect against
uncertainty in the level of future currency exchange rates, a Fund is authorized
to enter into various currency exchange transactions.
Temporary Investments: The Funds may, without limit as to percentage of
assets, purchase U.S. government securities or short-term debt securities to
keep cash on hand fully invested or for temporary defensive purposes. Short-term
debt securities are securities from issuers having a long-term debt rating of at
least A by Standard & Poor's Ratings Group ("S&P Ratings"), Moody's Investors
Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch") and having a maturity of one
year or less. The use of temporary investments is not a part of a principal
investment strategy of the Funds.
Short-term debt securities are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United
States; (b) the Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Tennessee Valley Authority, whose securities are supported
by the right of the agency to borrow from the U.S. Treasury; (c) Federal
- 8 -
National Mortgage Association ("FNMA" or "Fannie Mae") which is a
government-sponsored organization owned entirely by private stockholders
and whose securities are guaranteed as to principal and interest by FNMA;
and (d) the Student Loan Marketing Association, whose securities are
supported only by its credit. In September 2008, FNMA was placed into
conservatorship overseen by the Federal Housing Finance Agency ("FHFA").
As conservator, FHFA will succeed to the rights, titles, powers and
privileges of FNMA and any stockholder, officer or director of the company
with respect to FNMA and its assets and title to all books, records and
company assets held by any other custodian or third party. FHFA is charged
with operating FNMA. While the U.S. government provides financial support
to such U.S. government-sponsored agencies or instrumentalities, no
assurance can be given that it always will do so since it is not so
obligated by law. The U.S. government, its agencies, and instrumentalities
do not guarantee the market value of their securities, and consequently,
the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a
bank or savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. If such certificates of deposit are non-negotiable, they will
be considered illiquid securities and be subject to a Fund's 15%
restriction on investments in illiquid securities. Pursuant to the
certificate of deposit, the issuer agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
increased the maximum amount of federal deposit insurance coverage payable
as to any certificate of deposit from $100,000 to $250,000 per depositor,
and the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted
on July 21, 2010, extended this increased coverage permanently.
Certificates of deposit purchased by the Funds may not be fully insured.
(3) Bankers' acceptances, which are short-term credit instruments
used to finance commercial transactions. Generally, an acceptance is a
time draft drawn on a bank by an exporter or an importer to obtain a
stated amount of funds to pay for specific merchandise. The draft is then
"accepted" by a bank that, in effect, unconditionally guarantees to pay
the face value of the instrument on its maturity date. The acceptance may
then be held by the accepting bank as an asset or it may be sold in the
secondary market at the going rate of interest for a specific maturity.
(4) Repurchase agreements, which involve purchases of debt
securities. In such an action, at the time a Fund purchases the security,
it simultaneously agrees to resell and redeliver the security to the
seller, who also simultaneously agrees to buy back the security at a fixed
price and time. This assures a predetermined yield for a Fund during its
holding period since the resale price is always greater than the purchase
price and reflects an agreed upon market rate. The period of these
repurchase agreements will usually be short, from overnight to one week.
Such actions afford an opportunity for a Fund to invest temporarily
available cash. The Funds may enter into repurchase agreements only with
respect to obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers acceptances in
- 9 -
which the Funds may invest. In addition, the Funds may only enter into
repurchase agreements where the market value of the purchased
securities/collateral equals at least 100% of principal including accrued
interest and is marked-to-market daily. The risk to the Funds is limited
to the ability of the seller to pay the agreed-upon sum on the repurchase
date; in the event of default, the repurchase agreement provides that the
affected Fund is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, however,
and if the seller defaults under a repurchase agreement when the value of
the underlying collateral is less than the repurchase price, a Fund could
incur a loss of both principal and interest. The Funds, however, intend to
enter into repurchase agreements only with financial institutions and
dealers believed by First Trust to present minimal credit risks in
accordance with criteria approved by the Board of Trustees. First Trust
will review and monitor the creditworthiness of such institutions. First
Trust monitors the value of the collateral at the time the action is
entered into and during the term of the repurchase agreement. First Trust
does so in an effort to determine that the value of the collateral always
equals or exceeds the agreed-upon repurchase price to be paid to a Fund.
If the seller were to be subject to a federal bankruptcy proceeding, the
ability of a Fund to liquidate the collateral could be delayed or impaired
because of certain provisions of the bankruptcy laws.
(5) Bank time deposits, which are monies kept on deposit with banks
or savings and loan associations for a stated period of time at a fixed
rate of interest. There may be penalties for the early withdrawal of such
time deposits, in which case the yields of these investments will be
reduced.
(6) Commercial paper, which are short-term unsecured promissory
notes, including variable rate master demand notes issued by corporations
to finance their current operations. Master demand notes are direct
lending arrangements between the Fund and a corporation. There is no
secondary market for the notes. However, they are redeemable by a Fund at
any time. A Fund's portfolio managers will consider the financial
condition of the corporation (e.g., earning power, cash flow, and other
liquidity ratios) and will continuously monitor the corporation's ability
to meet all of its financial obligations, because a Fund's liquidity might
be impaired if the corporation were unable to pay principal and interest
on demand. The Funds may only invest in commercial paper rated A-1 or
higher by S&P Ratings, Prime-1 or higher by Moody's or F2 or higher by
Fitch.
Pooled Investment Vehicles: The Multi-Asset Diversified Income Index Fund
may invest in other pooled investment vehicles, including open-end or closed-end
investment companies, other exchange-traded funds ("ETFs") and business
development companies that invest primarily in securities of the types in which
the Fund may invest directly. As a shareholder in a pooled investment vehicle,
the Fund will bear its ratable share of that vehicle's expenses, and would
remain subject to payment of the Fund's management fees with respect to assets
so invested. Shareholders would therefore be subject to duplicative expenses to
the extent the Fund invests in other pooled investment vehicles. In addition,
the Fund will incur brokerage costs when purchasing and selling shares of ETFs.
Other pooled investment vehicles may be leveraged, and the net asset value and
- 10 -
market value of their securities will therefore be more volatile and the yield
to shareholders will tend to fluctuate more than the yield of unleveraged pooled
investment vehicles.
PORTFOLIO TURNOVER
The Funds buy and sell portfolio securities in the normal course of their
investment activities. The proportion of a Fund's investment portfolio that is
bought and sold during a year is known as a Fund's portfolio turnover rate. A
turnover rate of 100% would occur, for example, if a Fund bought and sold
securities valued at 100% of its net assets within one year. A high portfolio
turnover rate could result in the payment by a Fund of increased brokerage
costs, expenses and taxes. The portfolio turnover rates for the Funds for the
fiscal period ended September 30, 2012 are set forth in the table below.
PORTFOLIO TURNOVER RATE
FISCAL PERIOD
AUGUST 13, 2012 THROUGH
FUND SEPTEMBER 30, 2012
First Trust NASDAQ Technology Dividend Index Fund 18%
Multi-Asset Diversified Income Index Fund 34%
|
HEDGING STRATEGIES
General Description of Hedging Strategies
The Funds may engage in hedging activities. First Trust may cause the
Funds to utilize a variety of financial instruments, including options, forward
contracts, futures contracts (hereinafter referred to as "Futures" or "Futures
Contracts"), and options on Futures Contracts to attempt to hedge each Fund's
holdings. The use of Futures and options is not a part of a principal investment
strategy of the Funds.
Hedging or derivative instruments on securities generally are used to
hedge against price movements in one or more particular securities positions
that a Fund owns or intends to acquire. Such instruments may also be used to
"lock-in" realized but unrecognized gains in the value of portfolio securities.
Hedging instruments on stock indices, in contrast, generally are used to hedge
against price movements in broad equity market sectors in which a Fund has
invested or expects to invest. Hedging strategies, if successful, can reduce the
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. The use of
hedging instruments is subject to applicable regulations of the SEC, the several
options and futures exchanges upon which they are traded, the Commodity Futures
- 11 -
Trading Commission (the "CFTC") and various state regulatory authorities. In
addition, a Fund's ability to use hedging instruments may be limited by tax
considerations.
General Limitations on Futures and Options Transactions
Each Fund limits its direct investments in futures, options on futures and
swaps to the extent necessary for the Advisor to claim the exclusion from
regulation as a "commodity pool operator" with respect to each Fund under CFTC
Rule 4.5, as such rule may be amended from time to time. Under Rule 4.5 as
currently in effect, each Fund limits its trading activity in futures, option on
futures and swaps (excluding activity for "bona fide hedging purposes," as
defined by the CFTC) such that it meets one of the following tests: (i)
aggregate initial margin and premiums required to establish its futures, options
on futures and swap positions do not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
such positions; or (ii) aggregate net notional value of its futures, options on
futures and swap positions does not exceed 100% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
such positions.
The Advisor has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with respect to each Fund with
the National Futures Association, the Futures industry's self-regulatory
organization. The Funds will not enter into Futures Contracts and options
transactions if more than 30% of their net assets would be committed to such
instruments.
If a Fund were no longer able to claim the exclusion, the Advisor would be
required to register as a "commodity pool operator," and the Fund and the
Advisor would be subject to regulation under the Commodity Exchange Act (the
"CEA").
The foregoing limitations are non-fundamental policies of the Funds and
may be changed without shareholder approval as regulatory agencies permit.
Asset Coverage for Futures and Options Positions
The Funds will comply with the regulatory requirements of the SEC and the
CFTC with respect to coverage of options and Futures positions by registered
investment companies and, if the guidelines so require, will earmark or set
aside cash, U.S. government securities, high grade liquid debt securities and/or
other liquid assets permitted by the SEC and CFTC in a segregated custodial
account in the amount prescribed. Securities earmarked or held in a segregated
account cannot be sold while the Futures or options position is outstanding,
unless replaced with other permissible assets, and will be marked-to-market
daily.
Stock Index Options
The Funds may purchase stock index options, sell stock index options in
order to close out existing positions, and/or write covered options on stock
indices for hedging purposes. Stock index options are put options and call
options on various stock indices. In most respects, they are identical to listed
- 12 -
options on common stocks. The primary difference between stock options and index
options occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the exercise
of an index option, settlement does not occur by delivery of the securities
comprising the stock index. The option holder who exercises the index option
receives an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the stock index and the exercise
price of the option expressed in dollars times a specified multiple.
A stock index fluctuates with changes in the market values of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the S&P 500 Index or the Value Line(R) Composite
Index or a more narrow market index, such as the S&P 100 Index. Indices may also
be based on an industry or market segment. Options on stock indices are
currently traded on the following exchanges: the Chicago Board Options Exchange,
NYSE Amex Options, NASDAQ(R) and the Philadelphia Stock Exchange.
The Funds' use of stock index options is subject to certain risks.
Successful use by a Fund of options on stock indices will be subject to the
ability of First Trust to correctly predict movements in the directions of the
stock market. This requires different skills and techniques than predicting
changes in the prices of individual securities. In addition, a Fund's ability to
effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline through transactions in put options
on stock indices, depends on the degree to which price movements in the
underlying index correlate with the price movements of the securities held by
the Fund. Inasmuch as the Funds' securities will not duplicate the components of
an index, the correlation will not be perfect. Consequently, a Fund will bear
the risk that the prices of its securities being hedged will not move in the
same amount as the prices of its put options on the stock indices. It is also
possible that there may be a negative correlation between the index and a Fund's
securities, which would result in a loss on both such securities and the options
on stock indices acquired by the Fund.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. The purchase of options is a highly specialized
activity, which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. The purchase of
stock index options involves the risk that the premium and transaction costs
paid by a Fund in purchasing an option will be lost as a result of unanticipated
movements in prices of the securities comprising the stock index on which the
option is based.
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If a
Fund is unable to close out a call option on securities that it has written
- 13 -
before the option is exercised, a Fund may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such
securities. If a Fund is unable to effect a closing sale transaction with
respect to options on securities that it has purchased, it would have to
exercise the option in order to realize any profit and would incur transaction
costs upon the purchase and sale of the underlying securities.
The writing and purchasing of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging. Options transactions may result in significantly higher
transaction costs and portfolio turnover for the Funds.
Futures Contracts
The Funds may enter into Futures Contracts, including index Futures as a
hedge against movements in the equity markets, in order to hedge against changes
on securities held or intended to be acquired by a Fund or for other purposes
permissible under the CEA. A Fund's hedging may include sales of Futures as an
offset against the effect of expected declines in stock prices and purchases of
Futures as an offset against the effect of expected increases in stock prices.
The Funds will not enter into Futures Contracts which are prohibited under the
CEA and will, to the extent required by regulatory authorities, enter only into
Futures Contracts that are traded on national Futures exchanges and are
standardized as to maturity date and underlying financial instrument. The
principal interest rate Futures exchanges in the United States are the Chicago
Board of Trade and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the CEA by the CFTC.
An interest rate Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., a debt security) or currency for a specified price
at a designated date, time and place. An index Futures Contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index Futures
Contract was originally written. Transaction costs are incurred when a Futures
Contract is bought or sold and margin deposits must be maintained. A Futures
Contract may be satisfied by delivery or purchase, as the case may be, of the
instrument or by payment of the change in the cash value of the index. More
commonly, Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase price
is less than the original sale price, a gain will be realized. Conversely, if
the offsetting sale price is more than the original purchase price, a gain will
be realized; if it is less, a loss will be realized. The transaction costs must
also be included in these calculations. There can be no assurance, however, that
a Fund will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, a Fund will continue to be required to maintain
the margin deposits on the Futures Contract.
- 14 -
Margin is the amount of funds that must be deposited by a Fund with its
custodian in a segregated account in the name of the Futures commission merchant
in order to initiate Futures trading and to maintain a Fund's open positions in
Futures Contracts. A margin deposit is intended to ensure a Fund's performance
of the Futures Contract.
The margin required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded and may be significantly
modified from time to time by the exchange during the term of the Futures
Contract. Futures Contracts are customarily purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
Futures Contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to a Fund. In computing daily NAV, a Fund will mark
to market the current value of its open Futures Contracts. The Funds expect to
earn interest income on their margin deposits.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, a Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The day limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of Futures positions and subjecting some
investors to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a Futures position. A Fund would continue to be required
to meet margin requirements until the position is closed, possibly resulting in
a decline in the Fund's NAV. In addition, many of the contracts discussed above
- 15 -
are relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market will develop
or continue to exist.
A public market exists in Futures Contracts covering a number of indices,
including but not limited to, the S&P 500 Index, the S&P 100 Index, the
NASDAQ-100 Index(R), the Value Line(R) Composite Index and the NYSE Composite
Index(R).
Options on Futures
The Funds may also purchase or write put and call options on Futures
Contracts and enter into closing transactions with respect to such options to
terminate an existing position. A Futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a Futures Contract at a specified exercise price prior to the
expiration of the option. Upon exercise of a call option, the holder acquires a
long position in the Futures Contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. Prior to
exercise or expiration, a Futures option may be closed out by an offsetting
purchase or sale of a Futures option of the same series.
The Funds may use options on Futures Contracts in connection with hedging
strategies. Generally, these strategies would be applied under the same market
and market sector conditions in which the Funds use put and call options on
securities or indices. The purchase of put options on Futures Contracts is
analogous to the purchase of puts on securities or indices so as to hedge a
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a Futures Contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the Futures Contract. If the price at expiration of
a written call option is below the exercise price, a Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in a Fund's holdings of securities. If the price when the
option is exercised is above the exercise price, however, a Fund will incur a
loss, which may be offset, in whole or in part, by the increase in the value of
the securities held by a Fund that were being hedged. Writing a put option or
purchasing a call option on a Futures Contract serves as a partial hedge against
an increase in the value of the securities a Fund intends to acquire.
As with investments in Futures Contracts, the Funds are required to
deposit and maintain margin with respect to put and call options on Futures
Contracts written by them. Such margin deposits will vary depending on the
nature of the underlying Futures Contract (and the related initial margin
requirements), the current market value of the option, and other Futures
positions held by a Fund. A Fund will earmark or set aside in a segregated
account at such Fund's custodian, liquid assets, such as cash, U.S. government
securities or other high-grade liquid debt obligations equal in value to the
amount due on the underlying obligation. Such segregated assets will be
marked-to-market daily, and additional assets will be earmarked or placed in the
segregated account whenever the total value of the earmarked or segregated
assets falls below the amount due on the underlying obligation.
- 16 -
The risks associated with the use of options on Futures Contracts include
the risk that the Funds may close out its position as a writer of an option only
if a liquid secondary market exists for such options, which cannot be assured. A
Fund's successful use of options on Futures Contracts depends on First Trust's
ability to correctly predict the movement in prices of Futures Contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the Futures
Contract subject to the option. For additional information, see "Futures
Contracts." Certain characteristics of the Futures market might increase the
risk that movements in the prices of Futures Contracts or options on Futures
Contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the Futures and
options on Futures Contracts markets are subject to daily variation margin calls
and might be compelled to liquidate Futures or options on Futures Contracts
positions whose prices are moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price volatility of the instruments
and distort the normal price relationship between the Futures or options and the
investments being hedged. Also, because of initial margin deposit requirements,
there might be increased participation by speculators in the Futures markets.
This participation also might cause temporary price distortions. In addition,
activities of large traders in both the Futures and securities markets involving
arbitrage, "program trading," and other investment strategies might result in
temporary price distortions.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, as a non-principal investment
strategy certain of the Funds may lend portfolio securities representing up to
20% of the value of their total assets to broker-dealers, banks or other
institutional borrowers of securities. As with other extensions of credit, there
may be risks of delay in recovery of the securities or even loss of rights in
the collateral should the borrower of the securities fail financially. However,
the Funds will only enter into domestic loan arrangements with broker-dealers,
banks or other institutions which First Trust has determined are creditworthy
under guidelines approved by the Board of Trustees. The Funds will pay a portion
of the income earned on the lending transaction to the placing broker and may
pay administrative and custodial fees in connection with these loans.
In these loan arrangements, the Funds will receive collateral in the form
of cash, U.S. government securities equal to at least 102% (for domestic
securities) or 105% (for international securities) of the market value of the
securities loaned as determined at the time of loan origination. This collateral
must be valued daily by First Trust or the applicable Fund's lending agent and,
if the market value of the loaned securities increases, the borrower must
furnish additional collateral to the lending Fund. During the time portfolio
securities are on loan, the borrower pays the lending Fund any dividends or
interest paid on the securities. Loans are subject to termination at any time by
the lending Fund or the borrower. While a Fund does not have the right to vote
securities on loan, it would terminate the loan and regain the right to vote if
that were considered important with respect to the investment. When a Fund lends
portfolio securities to a borrower, payments in lieu of dividends made by the
borrower to the Fund will not constitute "qualified dividends" taxable at the
same rate as long-term capital gains, even if the actual dividends would have
constituted qualified dividends had the Fund held the securities.
- 17 -
SUBLICENSE AGREEMENT
The Trust on behalf of each Fund relies on a product license agreement
(the "Product License Agreement") by and between NASDAQ(R) (the "Index
Provider") and First Trust and a related sublicense agreement (the "Sublicense
Agreement") with First Trust that grants the Trust, on behalf of each Fund, a
non-exclusive and non-transferable sublicense to use certain intellectual
property of the Index Provider, in connection with the issuance, distribution,
marketing and/or promotion of the Fund. Pursuant to the Sublicense Agreement,
the Funds have agreed to be bound by certain provisions of the Product License
Agreement.
INVESTMENT RISKS
Overview
An investment in a Fund should be made with an understanding of the risks
which an investment in common stocks entails, including the risk that the
financial condition of the issuers of the equity securities or the general
condition of the common stock market may worsen and the value of the equity
securities and therefore the value of a Fund may decline. A Fund may not be an
appropriate investment for those who are unable or unwilling to assume the risks
involved generally with an equity investment. The past market and earnings
performance of any of the equity securities included in a Fund is not predictive
of their future performance. Common stocks are especially susceptible to general
stock market movements and to volatile increases and decreases of value as
market confidence in and perceptions of the issuers change. These perceptions
are based on unpredictable factors including expectations regarding government,
economic, monetary and fiscal policies, inflation and interest rates, economic
expansion or contraction, and global or regional political, economic or banking
crises. First Trust cannot predict the direction or scope of any of these
factors. Shareholders of common stocks have rights to receive payments from the
issuers of those common stocks that are generally subordinate to those of
creditors of, or holders of debt obligations or preferred stocks of, such
issuers.
Shareholders of common stocks of the type held by the Funds have a right
to receive dividends only when and if, and in the amounts, declared by the
issuer's board of directors and have a right to participate in amounts available
for distribution by the issuer only after all other claims on the issuer have
been paid. Common stocks do not represent an obligation of the issuer and,
therefore, do not offer any assurance of income or provide the same degree of
protection of capital as do debt securities. The issuance of additional debt
securities or preferred stock will create prior claims for payment of principal,
interest and dividends which could adversely affect the ability and inclination
of the issuer to declare or pay dividends on its common stock or the rights of
holders of common stock with respect to assets of the issuer upon liquidation or
bankruptcy. The value of common stocks is subject to market fluctuations for as
long as the common stocks remain outstanding, and thus the value of the equity
securities in the Funds will fluctuate over the life of the Funds and may be
more or less than the price at which they were purchased by the Funds. The
equity securities held in the Funds may appreciate or depreciate in value (or
pay dividends) depending on the full range of economic and market influences
- 18 -
affecting these securities, including the impact of a Fund's purchase and sale
of the equity securities and other factors.
Holders of common stocks incur more risk than holders of preferred stocks
and debt obligations because common stockholders, as owners of the entity, have
generally inferior rights to receive payments from the issuer in comparison with
the rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Cumulative preferred stock dividends must be paid before
common stock dividends and any cumulative preferred stock dividend omitted is
added to future dividends payable to the holders of cumulative preferred stock.
Preferred stockholders are also generally entitled to rights on liquidation
which are senior to those of common stockholders.
Whether or not the equity securities in the Funds are listed on a
securities exchange, the principal trading market for certain of the equity
securities in a Fund may be in the over-the-counter market. As a result, the
existence of a liquid trading market for the equity securities may depend on
whether dealers will make a market in the equity securities. There can be no
assurance that a market will be made for any of the equity securities, that any
market for the equity securities will be maintained or that there will be
sufficient liquidity of the equity securities in any markets made. The price at
which the equity securities are held in the Fund will be adversely affected if
trading markets for the equity securities are limited or absent.
ADDITIONAL RISKS OF INVESTING IN THE FUNDS
Liquidity Risk
Whether or not the equity securities in the Funds are listed on a
securities exchange, the principal trading market for certain of the equity
securities in a Fund may be in the over-the-counter ("OTC") market. As a result,
the existence of a liquid trading market for the equity securities may depend on
whether dealers will make a market in the equity securities. There can be no
assurance that a market will be made for any of the equity securities, that any
market for the equity securities will be maintained or that there will be
sufficient liquidity of the equity securities in any markets made. The price at
which the equity securities are held in the Funds will be adversely affected if
trading markets for the equity securities are limited or absent.
Non-U.S. Securities Risk
An investment in non-U.S. securities involves risks in addition to the
usual risks inherent in domestic investments, including currency risk. The value
of a non-U.S. security in U.S. dollars tends to decrease when the value of the
U.S. dollar rises against the non-U.S. currency in which the security is
denominated and tends to increase when the value of the U.S. dollar falls
against such currency. Non-U.S. securities are affected by the fact that in many
countries there is less publicly available information about issuers than is
available in the reports and ratings published about companies in the United
States and companies may not be subject to uniform accounting, auditing and
financial reporting standards. Other risks inherent in non-U.S. investments
include expropriation; confiscatory taxation; withholding taxes on dividends and
- 19 -
interest; less extensive regulation of non-U.S. brokers, securities markets and
issuers; diplomatic developments; and political or social instability. Non-U.S.
economies may differ favorably or unfavorably from the U.S. economy in various
respects, and many non-U.S. securities are less liquid and their prices tend to
be more volatile than comparable U.S. securities. From time to time, non-U.S.
securities may be difficult to liquidate rapidly without adverse price effects.
Depositary Receipts Risk
The Funds may hold securities of certain non-U.S. companies in the form of
Depositary Receipts. Depositary Receipts may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted.
ADRs are receipts typically issued by an American bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued by a European bank or trust company evidencing
ownership of securities issued by a foreign corporation. New York shares are
typically issued by a company incorporated in the Netherlands and represent a
direct interest in the company. Unlike traditional depositary receipts, New York
share programs do not involve custody of the Dutch shares of the company. GDRs
are receipts issued throughout the world that evidence a similar arrangement.
ADRs, EDRs and GDRs may trade in foreign currencies that differ from the
currency the underlying security for each ADR, EDR or GDR principally trades in.
Global shares are the actual (ordinary) shares of a non-U.S. company which trade
both in the home market and the United States. Generally, ADRs and New York
shares, in registered form, are designed for use in the U.S. securities markets.
EDRs, in registered form, are used to access European markets. GDRs, in
registered form, are tradable both in the United States and in Europe and are
designed for use throughout the world. Global shares are represented by the same
share certificate in the United States and the home market. Separate registrars
in the United States and the home country are maintained. In most cases,
purchases occurring on a U.S. exchange would be reflected on the U.S. registrar.
Global shares may also be eligible to list on exchanges in addition to the
United States and the home country. The Funds may hold unsponsored Depositary
Receipts. The issuers of unsponsored Depositary Receipts are not obligated to
disclose material information in the United States; therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Passive Foreign Investment Companies Risk
The Funds may invest in companies that are considered to be "passive
foreign investment companies" ("PFICs"), which are generally certain non-U.S.
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income. Therefore, the Funds could be subject to U.S. federal income tax
and additional interest charges on gains and certain distributions with respect
to those equity interests, even if all the income or gain is distributed to its
shareholders in a timely manner. A Fund will not be able to pass through to its
shareholders any credit or deduction for such taxes.
- 20 -
RISKS AND SPECIAL CONSIDERATIONS CONCERNING DERIVATIVES
In addition to the foregoing, the use of derivative instruments involves
certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of the
underlying assets may go up or down. Adverse movements in the value of an
underlying asset can expose the Funds to losses. Derivative instruments
may include elements of leverage and, accordingly, fluctuations in the
value of the derivative instrument in relation to the underlying asset may
be magnified. The successful use of derivative instruments depends upon a
variety of factors, particularly the portfolio managers' ability to
predict movements of the securities, currencies, and commodities markets,
which may require different skills than predicting changes in the prices
of individual securities. There can be no assurance that any particular
strategy adopted will succeed. A decision to engage in a derivative
transaction will reflect the portfolio managers' judgment that the
derivative transaction will provide value to a Fund and its shareholders
and is consistent with a Fund's objective, investment limitations, and
operating policies. In making such a judgment, the portfolio managers will
analyze the benefits and risks of the derivative transactions and weigh
them in the context of a Fund's overall investments and investment
objective.
(2) Credit Risk. Credit risk is the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with the
terms of a derivative instrument. The counterparty risk for
exchange-traded derivatives is generally less than for
privately-negotiated or OTC derivatives, since generally a clearing
agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all
transactions, the Funds will bear the risk that the counterparty will
default, and this could result in a loss of the expected benefit of the
derivative transactions and possibly other losses to the Funds. The Funds
will enter into transactions in derivative instruments only with
counterparties that First Trust reasonably believes are capable of
performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there might
be an imperfect correlation, or even no correlation, between price
movements of a derivative instrument and price movements of investments
being hedged. When a derivative transaction is used to completely hedge
another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments.
With a perfect hedge, the value of the combined position remains unchanged
with any change in the price of the underlying asset. With an imperfect
hedge, the value of the derivative instrument and its hedge are not
perfectly correlated. For example, if the value of a derivative instrument
used in a short hedge (such as writing a call option, buying a put option
or selling a Futures Contract) increased by less than the decline in value
of the hedged investments, the hedge would not be perfectly correlated.
This might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in
- 21 -
which these instruments are traded. The effectiveness of hedges using
instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and the price movements in the
investments being hedged.
(4) Liquidity Risk. Liquidity risk is the risk that a derivative
instrument cannot be sold, closed out, or replaced quickly at or very
close to its fundamental value. Generally, exchange contracts are very
liquid because the exchange clearinghouse is the counterparty of every
contract. OTC transactions are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party
to the transaction. The Funds might be required by applicable regulatory
requirements to maintain assets as "cover," maintain segregated accounts,
and/or make margin payments when they take positions in derivative
instruments involving obligations to third parties (i.e., instruments
other than purchase options). If a Fund is unable to close out its
positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expires, matures, or is closed out. These requirements might impair a
Fund's ability to sell a security or make an investment at a time when it
would otherwise be favorable to do so, or require that a Fund sell a
portfolio security at a disadvantageous time. A Fund's ability to sell or
close out a position in an instrument prior to expiration or maturity
depends upon the existence of a liquid secondary market or, in the absence
of such a market, the ability and willingness of the counterparty to enter
into a transaction closing out the position. Due to liquidity risk, there
is no assurance that any derivatives position can be sold or closed out at
a time and price that is favorable to a Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside in
exchange for downside protection, the party taking the risk is looking for
a positive payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative transaction may try to
avoid payment by exploiting various legal uncertainties about certain
derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or interconnection
risk is the risk that a disruption in the financial markets will cause
difficulties for all market participants. In other words, a disruption in
one market will spill over into other markets, perhaps creating a chain
reaction. Much of the OTC derivatives market takes place among the OTC
dealers themselves, thus creating a large interconnected web of financial
obligations. This interconnectedness raises the possibility that a default
by one large dealer could create losses for other dealers and destabilize
the entire market for OTC derivative instruments.
- 22 -
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS
The general supervision of the duties performed for the Funds under the
investment management agreement is the responsibility of the Board of Trustees.
There are five Trustees of the Trust, one of whom is an "interested person" (as
the term is defined in the 1940 Act) and four of whom are Trustees who are not
officers or employees of First Trust or any of its affiliates ("Independent
Trustees"). The Trustees set broad policies for the Funds, choose the Trust's
officers and hire the Trust's investment advisor. The officers of the Trust
manage its day-to-day operations and are responsible to the Trust's Board of
Trustees. The following is a list of the Trustees and executive officers of the
Trust and a statement of their present positions and principal occupations
during the past five years, the number of portfolios each Trustee oversees and
the other directorships they hold, if applicable. Each Trustee has been elected
for an indefinite term. The officers of the Trust serve indefinite terms. Each
Trustee, except for James A. Bowen, is an Independent Trustee. Mr. Bowen is
deemed an "interested person" (as that term is defined in the 1940 Act)
("Interested Trustee") of the Trust due to his position as Chief Executive
Officer of First Trust, investment advisor to the Funds.
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE THE FIRST TRUST OTHER
AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Trustee who is an Interested
Person of the Trust
----------------------------
James A. Bowen(1) Chairman of the o Indefinite Chief Executive Officer 98 Portfolios None
120 East Liberty Drive, Board and Trustee term (December 2010 to
Suite 400 Present), President
Wheaton, IL 60187 (until December 2010),
D.O.B.: 09/55 o Since First Trust Advisors L.P.
inception and First Trust
Portfolios L.P.; Chairman
of the Board of
Directors, BondWave LLC
(Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
Independent Trustees
----------------------------
Richard E. Erickson Trustee o Indefinite Physician; President, 98 Portfolios None
c/o First Trust Advisors L.P. term Wheaton Orthopedics;
120 East Liberty Drive, Co-owner and Co-Director
Suite 400 (January 1996 to May
Wheaton, IL 60187 o Since 2007), Sports Med Center
D.O.B.: 04/51 inception for Fitness; Limited
Partner, Gundersen Real
Estate Limited
Partnership; Member,
Sportsmed LLC
- 23 -
|
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE THE FIRST TRUST OTHER
AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Thomas R. Kadlec Trustee o Indefinite President (March 2010 to 98 Portfolios Director of ADM
c/o First Trust Advisors L.P. term Present), Senior Vice Investor
120 East Liberty Drive, President and Chief Services, Inc.
Suite 400 o Since Financial Officer (May and ADM Investor
Wheaton, IL 60187 inception 2007 to March 2010), Vice Services
D.O.B.: 11/57 President and Chief International
Financial Officer (1990
to May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant)
Robert F. Keith Trustee o Indefinite President (2003 to 98 Portfolios Director of
c/o First Trust Advisors L.P. term Present), Hibs Trust Company of
120 East Liberty Drive, Enterprises (Financial Illinois
Suite 400 o Since and Management
Wheaton, IL 60187 inception Consulting)
D.O.B.: 11/56
Niel B. Nielson Trustee o Indefinite President and Chief 98 Portfolios Director of
c/o First Trust Advisors L.P. term Executive Officer (July Covenant
120 East Liberty Drive, 2012 to Present), Dew Transport Inc.
Suite 400 o Since Learning LLC (Educational
Wheaton, IL 60187 inception Products and Services);
D.O.B.: 03/54 President (June 2002 to
June 2012), Covenant
College
Officers of the Trust
----------------------------
Mark R. Bradley President and Chief o Indefinite Chief Financial Officer, N/A N/A
120 East Liberty Drive, Executive Officer term Chief Operating Officer
Suite 400 (December 2010 to
Wheaton, IL 60187 Present), First Trust
D.O.B.: 11/57 o Since Advisors L.P. and First
inception Trust Portfolios L.P.;
Chief Financial Officer,
BondWave LLC (Software
Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
James M. Dykas Treasurer, Chief o Indefinite Controller (January 2011 N/A N/A
120 East Liberty Drive, Financial Officer term to Present), Senior Vice
Suite 400 and Chief Accounting President (April 2007 to
Wheaton, IL 60187 Officer o Since January 2011), First
D.O.B.: 01/66 inception Trust Advisors L.P. and
First Trust Portfolios
L.P.
W. Scott Jardine Secretary and Chief o Indefinite General Counsel, First N/A N/A
120 East Liberty Drive, Legal Officer term Trust Advisors L.P. and
Suite 400 First Trust Portfolios
Wheaton, IL 60187 o Since L.P.; Secretary, BondWave
D.O.B.: 05/60 inception LLC (Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
- 24 -
|
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE THE FIRST TRUST OTHER
AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Daniel J. Lindquist Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (September 2005 to
Suite 400 Present), First Trust
Wheaton, IL 60187 o Since Advisors L.P. and First
D.O.B.: 02/70 inception Trust Portfolios L.P.
Kristi A. Maher Assistant Secretary o Indefinite Deputy General Counsel N/A N/A
120 East Liberty Drive, and Chief Compliance term (May 2007 to Present),
Suite 400 Officer First Trust Advisors L.P.
Wheaton, IL 60187 o Since and First Trust
D.O.B.: 12/66 inception Portfolios L.P.
Roger F. Testin Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (November 2003 to
Suite 400 Present), First Trust
Wheaton, IL 60187 o Since Advisors L.P. and First
D.O.B.: 06/66 inception Trust Portfolios L.P.
Stan Ueland Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (September 2012 to
Suite 400 Present), Vice President
Wheaton, IL 60187 o Since (August 2005 to September
D.O.B.: 11/70 inception 2012), First Trust
Advisors L.P. and First
Trust Portfolios L.P.
|
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust, investment advisor
of the Funds.
UNITARY BOARD LEADERSHIP STRUCTURE
Each Trustee serves as a trustee of all open-end and closed-end funds in
the First Trust Fund Complex (as defined below), which is known as a "unitary"
board leadership structure. Each Trustee currently serves as a trustee of First
Trust Series Fund, First Trust Variable Insurance Trust and First Defined
Portfolio Fund, LLC, open-end funds with twelve portfolios advised by First
Trust; First Trust Senior Floating Rate Income Fund II, Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund, First Trust High Income
Long/Short Fund, First Trust Energy Infrastructure Fund and First Trust MLP and
Energy Income Fund, closed-end funds advised by First Trust; and the Trust,
First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First
Trust Exchange-Traded Fund IV, First Trust Exchange-Traded AlphaDEX(R) Fund and
First Trust Exchange-Traded AlphaDEX(R) Fund II, exchange-traded funds with 73
portfolios advised by First Trust (each a "First Trust Fund" and collectively,
the "First Trust Fund Complex"). None of the Trustees who are not "interested
persons" of the Trust, nor any of their immediate family members, has ever been
a director, officer or employee of, or consultant to, First Trust, First Trust
Portfolios or their affiliates. In addition, the officers of the Trust (other
than Stan Ueland and Roger Testin) hold the same positions with the other funds
in the First Trust Fund Complex as they hold with the Trust. Mr. Ueland, Vice
- 25 -
President of the Trust, serves in the same position for all of the funds in the
First Trust Fund Complex with the exception of First Defined Portfolio Fund,
LLC, First Trust Series Fund, First Trust Variable Insurance Trust and the
closed-end funds. Mr. Testin, Vice President of the Trust, serves in the same
position for all funds in the First Trust Fund Complex with the exception of the
closed-end funds.
The management of the Funds, including general supervision of the duties
performed for the Funds under the investment management agreement between the
Trust, on behalf of the Funds, and the Advisor, is the responsibility of the
Board of Trustees. The Trustees of the Trust set broad policies for the Funds,
choose the Trust's officers, and hire the Funds' investment advisor and other
service providers. The officers of the Trust manage the day-to-day operations
and are responsible to the Trust's Board. The Trust's Board is composed of four
Independent Trustees and one Interested Trustee. The Interested Trustee, James
A. Bowen, serves as the Chairman of the Board for each fund in the First Trust
Fund Complex.
The same five persons serve as Trustees on the Trust's Board and on the
Boards of all other First Trust Funds. The unitary board structure was adopted
for the First Trust Funds because of the efficiencies it achieves with respect
to the governance and oversight of the First Trust Funds. Each First Trust Fund
is subject to the rules and regulations of the 1940 Act (and other applicable
securities laws), which means that many of the First Trust Funds face similar
issues with respect to certain of their fundamental activities, including risk
management, portfolio liquidity, portfolio valuation and financial reporting.
Because of the similar and often overlapping issues facing the First Trust
Funds, the Board of the First Trust Funds believes that maintaining a unitary
board structure promotes efficiency and consistency in the governance and
oversight of all First Trust Funds and reduces the costs, administrative burdens
and possible conflicts that may result from having multiple boards. In adopting
a unitary board structure, the Trustees seek to provide effective governance
through establishing a board the overall composition of which will, as a body,
possesses the appropriate skills, diversity, independence and experience to
oversee the Funds' business.
Annually, the Board reviews its governance structure and the committee
structures, their performance and functions and reviews any processes that would
enhance Board governance over the Funds' business. The Board has determined that
its leadership structure, including the unitary board and committee structure,
is appropriate based on the characteristics of the funds it serves and the
characteristics of the First Trust Fund Complex as a whole.
In order to streamline communication between the Advisor and the
Independent Trustees and create certain efficiencies, the Board has a Lead
Independent Trustee who is responsible for: (i) coordinating activities of the
Independent Trustees; (ii) working with the Advisor, Fund counsel and the
independent legal counsel to the Independent Trustees to determine the agenda
for Board meetings; (iii) serving as the principal contact for and facilitating
communication between the Independent Trustees and the Funds' service providers,
particularly the Advisor; and (iv) any other duties that the Independent
Trustees may delegate to the Lead Independent Trustee. The Lead Independent
Trustee is selected by the Independent Trustees and currently serves a two-year
term or until his successor is selected. Commencing January 1, 2014, the Lead
Independent Trustee will serve a three-year term.
- 26 -
The Board has established four standing committees (as described below)
and has delegated certain of its responsibilities to those committees. The Board
and its committees meet frequently throughout the year to oversee the Funds'
activities, review contractual arrangements with and performance of service
providers, oversee compliance with regulatory requirements, and review Fund
performance. The Independent Trustees are represented by independent legal
counsel at all Board and committee meetings (other than meetings of the
Executive Committee). Generally, the Board acts by majority vote of all the
Trustees, including a majority vote of the Independent Trustees if required by
applicable law.
The three committee Chairmen and the Lead Independent Trustee currently
rotate every two years in serving as Chairman of the Audit Committee, the
Nominating and Governance Committee or the Valuation Committee, or as Lead
Independent Trustee. Commencing January 1, 2014, the three committee Chairmen
and the Lead Independent Trustee will rotate every three years. The Lead
Independent Trustee also serves on the Executive Committee with the Interested
Trustee.
The four standing committees of the First Trust Fund Complex are: the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Trust's Declaration of Trust and By-Laws. Such Committee
is also responsible for the declaration and setting of dividends. Mr. Keith and
Mr. Bowen are members of the Executive Committee. During the last fiscal period,
the Executive Committee held one meeting.
The Nominating and Governance Committee is responsible for appointing and
nominating non-interested persons to the Trust's Board of Trustees. Messrs.
Erickson, Kadlec, Keith and Nielson are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including shareholders. The
Board of Trustees adopted a mandatory retirement age of 72 for Trustees, beyond
which age Trustees are ineligible to serve. The Committee will not consider new
trustee candidates who are 72 years of age or older. When a vacancy on the Board
of Trustees of a First Trust Fund occurs and nominations are sought to fill such
vacancy, the Nominating and Governance Committee may seek nominations from those
sources it deems appropriate in its discretion, including shareholders of the
applicable fund. To submit a recommendation for nomination as a candidate for a
position on the Board of Trustees, shareholders of the applicable fund shall
mail such recommendation to W. Scott Jardine, Secretary, at the Trust's address,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation
shall include the following information: (i) evidence of fund ownership of the
person or entity recommending the candidate (if a Fund shareholder); (ii) a full
description of the proposed candidate's background, including their education,
experience, current employment and date of birth; (iii) names and addresses of
at least three professional references for the candidate; (iv) information as to
whether the candidate is an "interested person" in relation to the fund, as such
term is defined in the 1940 Act, and such other information that may be
considered to impair the candidate's independence; and (v) any other information
that may be helpful to the Committee in evaluating the candidate. If a
- 27 -
recommendation is received with satisfactorily completed information regarding a
candidate during a time when a vacancy exists on the Board or during such other
time as the Nominating and Governance Committee is accepting recommendations,
the recommendation will be forwarded to the Chairman of the Nominating and
Governance Committee and the counsel to the Independent Trustees.
Recommendations received at any other time will be kept on file until such time
as the Nominating and Governance Committee is accepting recommendations, at
which point they may be considered for nomination. During the last fiscal
period, the Nominating and Governance Committee held one meeting.
The Valuation Committee is responsible for the oversight of the pricing
procedures of each Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members
of the Valuation Committee. During the last fiscal period, the Valuation
Committee held one meeting.
The Audit Committee is responsible for overseeing each Fund's accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to Board
approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit
Committee. During the last fiscal period, the Audit Committee held two meetings.
RISK OVERSIGHT
As part of the general oversight of the Funds, the Board is involved in
the risk oversight of the Funds. The Board has adopted and periodically reviews
policies and procedures designed to address each Fund's risks. Oversight of
investment and compliance risk, including oversight of any sub-advisors, is
performed primarily at the Board level in conjunction with the Advisor's
investment oversight group and the Trust's Chief Compliance Officer ("CCO").
Oversight of other risks also occurs at the committee level. The Advisor's
investment oversight group reports to the Board at quarterly meetings regarding,
among other things, Fund performance and the various drivers of such
performance. The Board reviews reports on the Funds' and the service providers'
compliance policies and procedures at each quarterly Board meeting and receives
an annual report from the CCO regarding the operations of the Funds' and the
service providers' compliance program. In addition, the Independent Trustees
meet privately each quarter with the CCO. The Audit Committee reviews with the
Advisor each Fund's major financial risk exposures and the steps the Advisor has
taken to monitor and control these exposures, including each Fund's risk
assessment and risk management policies and guidelines. The Audit Committee
also, as appropriate, reviews in a general manner the processes other Board
committees have in place with respect to risk assessment and risk management.
The Nominating and Governance Committee monitors all matters related to the
corporate governance of the Funds. The Valuation Committee monitors valuation
risk and compliance with the Funds' Valuation Procedures and oversees the
pricing services and actions by the Advisor's Pricing Committee with respect to
the valuation of portfolio securities.
Not all risks that may affect the Funds can be identified nor can controls
be developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
- 28 -
Funds or the Advisor or other service providers. Moreover, it is necessary to
bear certain risks (such as investment related risks) to achieve a Fund's goals.
As a result of the foregoing and other factors, the Funds' ability to manage
risk is subject to substantial limitations.
BOARD DIVERSIFICATION AND TRUSTEE QUALIFICATIONS
As described above, the Nominating and Governance Committee of each Board
oversees matters related to the nomination of Trustees. The Nominating and
Governance Committee seeks to establish an effective Board with an appropriate
range of skills and diversity, including, as appropriate, differences in
background, professional experience, education, vocations, and other individual
characteristics and traits in the aggregate. Each Trustee must meet certain
basic requirements, including relevant skills and experience, time availability,
and if qualifying as an Independent Trustee, independence from the Advisor,
sub-advisors, underwriters or other service providers, including any affiliates
of these entities.
Listed below for each current Trustee are the experiences, qualifications
and attributes that led to the conclusion, as of the date of this SAI, that each
current Trustee should serve as a trustee.
Richard E. Erickson, M.D., is an orthopedic surgeon and President of
Wheaton Orthopedics. He also has been a co-owner and director of a fitness
center and a limited partner of two real estate companies. Dr. Erickson has
served as a Trustee of each First Trust Fund since its inception. Dr. Erickson
has also served as the Lead Independent Trustee (2008 - 2009), Chairman of the
Nominating and Governance Committee (2003 - 2007) and Chairman of the Valuation
Committee (June 2006 - 2007 and 2010 - 2011) of the First Trust Funds. He
currently serves as Chairman of the Audit Committee (since January 1, 2012) of
the First Trust Funds.
Thomas R. Kadlec is President of ADM Investor Services Inc. ("ADMIS"), a
futures commission merchant and wholly-owned subsidiary of the Archer Daniels
Midland Company ("ADM"). Mr. Kadlec has been employed by ADMIS and its
affiliates since 1990 in various accounting, financial, operations and risk
management capacities. Mr. Kadlec serves on the boards of several international
affiliates of ADMIS and is a member of ADM's Integrated Risk Committee, which is
tasked with the duty of implementing and communicating enterprise-wide risk
management. Mr. Kadlec has served as a Trustee of each First Trust Fund, except
First Defined Portfolio Fund, LLC, since its inception. He has served as a
Trustee of First Defined Portfolio Fund, LLC, since 2004. Mr. Kadlec also served
on the Executive Committee from the organization of the first First Trust
closed-end fund in 2003 until he was elected as the first Lead Independent
Trustee in December 2005, serving as such through 2007. He also served as
Chairman of the Valuation Committee (2008 - 2009), Chairman of the Audit
Committee (2010 - 2011) and he currently serves as Chairman of the Nominating
and Governance Committee (since January 1, 2012) of the First Trust Funds.
Robert F. Keith is President of Hibs Enterprises, a financial and
management consulting firm. Mr. Keith has been with Hibs Enterprises since 2003.
Prior thereto, Mr. Keith spent 18 years with ServiceMaster and Aramark,
including three years as President and COO of ServiceMaster Consumer Services,
- 29 -
where he led the initial expansion of certain products overseas, five years as
President and COO of ServiceMaster Management Services and two years as
President of Aramark ServiceMaster Management Services. Mr. Keith is a certified
public accountant and also has held the positions of Treasurer and Chief
Financial Officer of ServiceMaster, at which time he oversaw the financial
aspects of ServiceMaster's expansion of its Management Services division into
Europe, the Middle East and Asia. Mr. Keith has served as a Trustee of the First
Trust Funds since June 2006. Mr. Keith has also served as the Chairman of the
Audit Committee (2008 - 2009) and Chairman of the Nominating and Governance
Committee (2010 - 2011) of the First Trust Funds. He currently serves as Lead
Independent Trustee and on the Executive Committee (since January 1, 2012) of
the First Trust Funds.
Niel B. Nielson, Ph.D., has served as President and Chief Executive
Officer of Dew Learning LLC (a global provider of digital and on-line
educational products and services) since 2012. Mr. Nielson formerly served as
President of Covenant College (2002 - 2012), and as a partner and trader (of
options and futures contracts for hedging options) for Ritchie Capital Markets
Group (1996 -1997), where he held an administrative management position at this
proprietary derivatives trading company. He also held prior positions in new
business development for ServiceMaster Management Services Company, and in
personnel and human resources for NationsBank of North Carolina, N.A. and
Chicago Research and Trading Group, Ltd. ("CRT"). His international experience
includes serving as a director of CRT Europe, Inc. for two years, directing out
of London all aspects of business conducted by the U.K. and European subsidiary
of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago.
Mr. Nielson has served as a Trustee of each First Trust Fund since its inception
and of the First Trust Funds since 1999. Mr. Nielson has also served as the
Chairman of the Audit Committee (2003 - 2006), Chairman of the Nominating and
Governance Committee (2008 - 2009) and Lead Independent Trustee (2010 - 2011)
and currently serves as Chairman of the Valuation Committee (since January 1,
2012) of the First Trust Funds.
James A. Bowen is Chief Executive Officer of First Trust Advisors L.P. and
First Trust Portfolios L.P. and until January 23, 2012, also served as President
and Chief Executive Officer of the First Trust Funds. Mr. Bowen is involved in
the day-to-day management of the First Trust Funds and serves on the Executive
Committee. He has over 26 years of experience in the investment company business
in sales, sales management and executive management. Mr. Bowen has served as a
Trustee of each First Trust Fund since its inception and of the First Trust
Funds since 1999.
Each Independent Trustee is paid a fixed annual retainer of $125,000 per
year and an annual per fund fee of $4,000 for each closed-end fund or other
actively managed fund and $1,000 for each index fund in the First Trust Fund
Complex. The fixed annual retainer is allocated pro rata among each fund in the
First Trust Fund Complex based on net assets. Additionally, the Lead Independent
Trustee is paid $15,000 annually, the Chairman of the Audit Committee is paid
$10,000 annually, and each of the Chairmen of the Nominating and Governance
Committee and the Valuation Committee is paid $5,000 annually to serve in such
capacities, with such compensation allocated pro rata among each fund in the
First Trust Fund Complex based on net assets. Trustees are also reimbursed by
- 30 -
the investment companies in the First Trust Fund Complex for travel and
out-of-pocket expenses incurred in connection with all meetings.
The following table sets forth the estimated compensation (including
reimbursement for travel and out-of-pocket expenses) to be paid to each of the
Independent Trustees by the Funds for a full fiscal year and the actual
compensation paid by the First Trust Fund Complex for the calendar year ended
December 31, 2012, respectively. The Trust has no retirement or pension plans.
The officers and Trustee who are "interested persons" as designated above serve
without any compensation from the Trust. The Trust has no employees. Its
officers are compensated by First Trust.
ESTIMATED COMPENSATION FROM THE TOTAL COMPENSATION FROM
NAME OF TRUSTEE FUNDS(1) THE FIRST TRUST FUND COMPLEX(2)
Richard E. Erickson $2,930 $276,500
Thomas R. Kadlec $2,896 $271,500
Robert F. Keith $2,965 $282,250
Niel B. Nielson $2,919 $275,249
|
(1) The estimated compensation to be paid to the Independent Trustees for a
full fiscal year for services to the Funds.
(2) The total compensation paid to the Independent Trustees for the calendar
year ended December 31, 2012 for services to the twelve portfolios of
First Defined Portfolio Fund, LLC, First Trust Series Fund and First Trust
Variable Insurance Trust, open-end funds, 13 closed-end funds and 73
series of the Trust, First Trust Exchange-Traded Fund, First Trust
Exchange-Traded Fund II, First Trust Exchange-Traded Fund IV, First Trust
Exchange-Traded AlphaDEX(R) Fund and First Trust Exchange-Traded
AlphaDEX(R) Fund II, all advised by First Trust.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Funds and in other funds overseen by
the Trustees in the First Trust Fund Complex as of December 31, 2012:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
DOLLAR RANGE OF ALL REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN THE FIRST
IN THE FUNDS TRUST
TRUSTEE (NUMBER OF SHARES HELD) FUND COMPLEX
Interested Trustee
James A. Bowen None $50,001 - $100,000
Independent Trustees
Richard E. Erickson None Over $100,000
Thomas R. Kadlec None Over $100,000
Robert F. Keith None Over $100,000
Niel B. Nielson None Over $100,000
|
- 31 -
As of December 31, 2012, the Independent Trustees of the Trust and
immediate family members did not own beneficially or of record any class of
securities of an investment advisor or principal underwriter of the Funds or any
person directly or indirectly controlling, controlled by, or under common
control with an investment advisor or principal underwriter of the Funds.
As of December 31, 2012, the officers and Trustees, in the aggregate,
owned less than 1% of the Shares of each Fund.
The table set forth as Exhibit A shows the percentage ownership of each
shareholder or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) who, as of December 31, 2012,
owned of record, or is known by the Trust to have owned of record or
beneficially, 5% or more of the Shares of a Fund. A control person is one who
owns, either directly or indirectly, more than 25% of the voting securities of a
Fund or acknowledges the existence of control. A party that controls a Fund may
be able to significantly influence the outcome of any item presented to
shareholders for approval.
Information as to beneficial ownership is based on the securities position
listing reports as of December 31, 2012. The Funds do not have any knowledge of
who the ultimate beneficiaries are of the Shares.
Investment Advisor. The Board of Trustees of the Trust, including the
Independent Trustees, approved an investment management agreement (the
"Investment Management Agreement") for the Funds for an initial two-year term at
a meeting held on June 11, 2012. The Board of Trustees determined that the
Investment Management Agreement is in the best interests of the Funds in light
of the services, expenses and such other matters as the Board of Trustees
considered to be relevant in the exercise of its reasonable business judgment.
Pursuant to the Investment Management Agreement between First Trust and
the Trust, First Trust will manage the investment of the Funds' assets and will
be responsible for managing the Funds' business affairs and providing certain
clerical, bookkeeping and other administrative services, and for paying all
expenses of the Funds, excluding the fee payments under the Investment
Management Agreement, interest, taxes, brokerage commissions and other expenses
connected with the execution of portfolio transactions, distribution and service
fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses.
First Trust also permits any of its officers or employees to serve without
compensation as Trustees or officers of the Trust if elected to such positions.
The First Trust NASDAQ Technology Dividend Index Fund and Multi-Asset
Diversified Income Index Fund have agreed to pay First Trust an annual
management fee equal to 0.50% and 0.60% of their average daily net assets,
respectively. First Trust provides fund reporting services to the Funds for a
flat annual fee in the amount of $9,250 per Fund, which is included in the
annual management fee.
First Trust, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187,
is the investment advisor to the Funds. First Trust is a limited partnership
with one limited partner, Grace Partners of DuPage L.P., and one general
partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited
partnership with one general partner, The Charger Corporation, and a number of
limited partners. The Charger Corporation is an Illinois corporation controlled
- 32 -
by James A. Bowen, the Chief Executive Officer of First Trust. First Trust
discharges its responsibilities to the Funds subject to the policies of the
Board of Trustees.
First Trust provides investment tools and portfolios for advisors and
investors. First Trust is committed to theoretically sound portfolio
construction and empirically verifiable investment management approaches. Its
asset management philosophy and investment discipline are deeply rooted in the
application of intuitive factor analysis and model implementation to enhance
investment decisions.
Under the Investment Management Agreement, First Trust shall not be liable
for any loss sustained by reason of the purchase, sale or retention of any
security, whether or not such purchase, sale or retention shall have been based
upon the investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been selected with due care and
in good faith, except loss resulting from willful misfeasance, bad faith, or
gross negligence on the part of First Trust in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties. The Investment Management Agreement continues until two
years after the initial issuance of Fund Shares, and thereafter only if approved
annually by the Board of Trustees, including a majority of the Independent
Trustees. The Investment Management Agreement terminates automatically upon
assignment and is terminable at any time without penalty as to a Fund by the
Board of Trustees, including a majority of the Independent Trustees, or by vote
of the holders of a majority of the Fund's outstanding voting securities on 60
days' written notice to First Trust, or by First Trust on 60 days' written
notice to the Fund.
The following table sets forth the management fees (net of fee waivers and
expense reimbursements, where applicable) paid by each Fund and the fees waived
and expenses reimbursed, by First Trust for the specified periods.
AMOUNT OF MANAGEMENT FEES (NET OF
FEE WAIVERS AND EXPENSE AMOUNT OF FEES WAIVED AND EXPENSES
REIMBURSEMENTS BY FIRST TRUST) REIMBURSED BY FIRST TRUST
--------------------------------- ----------------------------------
FISCAL PERIOD AUGUST 13, 2012 THROUGH FISCAL PERIOD AUGUST 13, 2012 THROUGH
FUND SEPTEMBER 30, 2012 SEPTEMBER 30, 2012
FIRST TRUST NASDAQ $10,113 N/A
TECHNOLOGY DIVIDEND
INDEX FUND
- 33 -
|
AMOUNT OF MANAGEMENT FEES (NET OF
FEE WAIVERS AND EXPENSE AMOUNT OF FEES WAIVED AND EXPENSES
REIMBURSEMENTS BY FIRST TRUST) REIMBURSED BY FIRST TRUST
--------------------------------- ----------------------------------
FISCAL PERIOD AUGUST 13, 2012 THROUGH FISCAL PERIOD AUGUST 13, 2012 THROUGH
FUND SEPTEMBER 30, 2012 SEPTEMBER 30, 2012
MULTI-ASSET $12,113 N/A
DIVERSIFIED INCOME
INDEX FUND
|
Investment Committee. The Investment Committee of First Trust is primarily
responsible for the day-to-day management of the Funds. There are currently five
members of the Investment Committee, as follows:
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Daniel J. Lindquist Senior Vice President Since 2004 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
Jon C. Erickson Senior Vice President Since 1994 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
David G. McGarel Chief Investment Officer Since 1997 Chief Investment Officer (June
and Senior Vice President 2012 to Present), Senior Vice
President, First Trust
Advisors L.P. and First Trust
Portfolios L.P.
Roger F. Testin Senior Vice President Since 2001 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
Stan Ueland Senior Vice President Since 2005 Senior Vice President
(September 2012 to Present),
Vice President (August 2005 to
September 2012), First Trust
Advisors L.P. and First Trust
Portfolios L.P.
|
Daniel J. Lindquist: Mr. Lindquist is Chairman of the Investment Committee
and presides over Investment Committee meetings. Mr. Lindquist is also
responsible for overseeing the implementation of the Funds' investment
strategies.
- 34 -
David G. McGarel: As First Trust's Chief Investment Officer, Mr. McGarel
consults with the Investment Committee on market conditions and First Trust's
general investment philosophy.
Jon C. Erickson: As the head of First Trust's Equity Research Group, Mr.
Erickson is responsible for determining the securities to be purchased and sold
by funds that do not utilize quantitative investment strategies.
Roger F. Testin: As head of First Trust's Portfolio Management Group, Mr.
Testin is responsible for executing the instructions of the Strategy Research
Group and Equity Research Group in a Fund's portfolio.
Stan Ueland: Mr. Ueland executes the investment strategies of each of the
Funds.
No member of the Investment Committee beneficially owns any Shares of the
Funds.
Compensation. The compensation structure for each member of the Investment
Committee is based upon a fixed salary as well as a discretionary bonus
determined by the management of First Trust. Salaries are determined by
management and are based upon an individual's position and overall value to the
firm. Bonuses are also determined by management and are based upon an
individual's overall contribution to the success of the firm and the
profitability of the firm. Salaries and bonuses for members of the Investment
Committee are not based upon criteria such as performance of the Funds or the
value of assets included in the Funds' portfolios. In addition, Mr. Erickson,
Mr. Lindquist, Mr. McGarel and Mr. Ueland also have an indirect ownership stake
in the firm and will therefore receive their allocable share of
ownership-related distributions.
The Investment Committee manages the investment vehicles (other than the
Funds of the Trust) with the number of accounts and assets, as of September 30,
2012, set forth in the table below:
- 35 -
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES
NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS OTHER ACCOUNTS NUMBER OF
INVESTMENT COMMITTEE MEMBER ($ ASSETS) ($ ASSETS) ACCOUNTS ($ ASSETS)
Roger F. Testin
72 ($16,608,555,424) 8 ($162,277,851) 2,774 ($750,975,990)
Jon C. Erickson
72 ($16,608,555,424) 8 ($162,277,851) 2,774 ($750,975,990)
David G. McGarel
72 ($16,608,555,424) 8 ($162,277,851) 2,774 ($750,975,990)
Daniel J. Lindquist
72 ($16,608,555,424) N/A 2,774 ($750,975,990)
Stan Ueland
59 ($ 7,429,839,563) N/A N/A
|
None of the accounts managed by the Investment Committee pay an advisory
fee that is based upon the performance of the account. In addition, First Trust
believes that there are no material conflicts of interest that may arise in
connection with the Investment Committee's management of the Funds' investments
and the investments of the other accounts managed by the Investment Committee.
However, because the investment strategy of the Funds and the investment
strategies of many of the other accounts managed by the Investment Committee are
based on fairly mechanical investment processes, the Investment Committee may
recommend that certain clients sell and other clients buy a given security at
the same time. In addition, because the investment strategies of the Funds and
other accounts managed by the Investment Committee generally result in the
clients investing in readily available securities, First Trust believes that
there should not be material conflicts in the allocation of investment
opportunities between the Funds and other accounts managed by the Investment
Committee.
BROKERAGE ALLOCATIONS
First Trust is responsible for decisions to buy and sell securities for
the Funds and for the placement of the Funds' securities business, the
negotiation of the commissions to be paid on brokered transactions, the prices
for principal trades in securities, and the allocation of portfolio brokerage
and principal business. It is the policy of First Trust to seek the best
execution at the best security price available with respect to each transaction,
and with respect to brokered transactions in light of the overall quality of
brokerage and research services provided to First Trust and its clients. The
best price to a Fund means the best net price without regard to the mix between
purchase or sale price and commission, if any. Purchases may be made from
underwriters, dealers, and, on occasion, the issuers. Commissions will be paid
on a Fund's Futures and options transactions, if any. The purchase price of
portfolio securities purchased from an underwriter or dealer may include
underwriting commissions and dealer spreads. The Funds may pay mark-ups on
- 36 -
principal transactions. In selecting broker/dealers and in negotiating
commissions, First Trust considers, among other things, the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. Fund portfolio transactions may be effected with broker/dealers who
have assisted investors in the purchase of Shares.
Section 28(e) of the 1934 Act permits an investment advisor, under certain
circumstances, to cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for effecting a transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research services include (a)
furnishing advice as to the value of securities, the advisability of investing,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). Such brokerage and research services are
often referred to as "soft dollars." First Trust has advised the Board of
Trustees that it does not currently intend to use soft dollars.
Notwithstanding the foregoing, in selecting brokers, First Trust may in
the future consider investment and market information and other research, such
as economic, securities and performance measurement research, provided by such
brokers, and the quality and reliability of brokerage services, including
execution capability, performance, and financial responsibility. Accordingly,
the commissions charged by any such broker may be greater than the amount
another firm might charge if First Trust determines in good faith that the
amount of such commissions is reasonable in relation to the value of the
research information and brokerage services provided by such broker to First
Trust or the Trust. In addition, First Trust must determine that the research
information received in this manner provides the Funds with benefits by
supplementing the research otherwise available to the Funds. The Investment
Management Agreement provides that such higher commissions will not be paid by
the Funds unless the Advisor determines in good faith that the amount is
reasonable in relation to the services provided. The investment advisory fees
paid by the Funds to First Trust under the Investment Management Agreement would
not be reduced as a result of receipt by First Trust of research services.
First Trust places portfolio transactions for other advisory accounts
advised by it, and research services furnished by firms through which the Funds
effect their securities transactions may be used by First Trust in servicing all
of its accounts; not all of such services may be used by First Trust in
connection with the Funds. First Trust believes it is not possible to measure
separately the benefits from research services to each of the accounts
(including the Funds) advised by it. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions in
excess of those charged by another broker paid by each account for brokerage and
research services will vary. However, First Trust believes such costs to the
Funds will not be disproportionate to the benefits received by the Funds on a
continuing basis. First Trust seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Funds and another advisory account. In some cases, this procedure could have an
- 37 -
adverse effect on the price or the amount of securities available to the Funds.
In making such allocations between the Funds and other advisory accounts, the
main factors considered by First Trust are the respective investment objectives,
the relative size of portfolio holding of the same or comparable securities, the
availability of cash for investment and the size of investment commitments
generally held.
BROKERAGE COMMISSIONS
The following table sets forth the aggregate amount of brokerage
commissions paid by each Fund for the specified period.
AGGREGATE AMOUNT OF
BROKERAGE COMMISSIONS
---------------------
FISCAL PERIOD AUGUST 13, 2012 THROUGH
FUND SEPTEMBER 30, 2012
FIRST TRUST NASDAQ TECHNOLOGY $3,021
DIVIDEND INDEX FUND
MULTI-ASSET DIVERSIFIED INCOME $4,530
INDEX FUND
|
Administrator. Brown Brothers Harriman & Co ("BBH") serves as
Administrator for the Funds. Its principal address is 40 Water Street, Boston,
MA. 02109.
BBH serves as Administrator for the Trust pursuant to a Fund
Administration and Accounting Agreement. Under such agreement, BBH is obligated
on a continuous basis, to provide such administrative services as the Board of
Trustees reasonably deems necessary for the proper administration of the Trust
and the Funds. BBH will generally assist in all aspects of the Trust's and the
Funds' operations; supply and maintain office facilities (which may be in BBH 's
own offices), statistical and research data, data processing services, clerical,
accounting, bookkeeping and record keeping services (including, without
limitation, the maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other agency agents),
internal auditing, executive and administrative services, and stationery and
office supplies; prepare reports to shareholders or investors; prepare and file
tax returns; supply financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; and provide monitoring
reports and assistance regarding compliance with federal and state securities
laws.
Pursuant to the Fund Administration and Accounting Agreement, the Trust on
behalf of the Funds has agreed to indemnify the Administrator for certain
liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from negligence or willful
misconduct in the performance of its duties.
- 38 -
Pursuant to the Fund Administration and Accounting Agreement between BBH
and the Trust, each Fund has agreed to pay such compensation as is mutually
agreed from time to time and such out-of-pocket expenses as incurred by BBH in
the performance of its duties. This fee is subject to reduction for assets over
$1 billion. The Funds have not paid any fees to BBH under the Fund
Administration and Accounting Agreement, as the Advisor has assumed
responsibility for payment of these fees as part of the unitary management fee.
CUSTODIAN, TRANSFER AGENT, FUND ACCOUNTING AGENT, DISTRIBUTOR, INDEX
PROVIDER AND EXCHANGE
Custodian, Transfer Agent and Accounting Agent. BBH, as custodian for the
Funds pursuant to a Custody Agreement, holds each Fund's assets which may be
held through U.S. and non-U.S. sub-custodians and depositories BBH also serves
as transfer agent of the Funds pursuant to an Administrative Agency Agreement.
As the Funds' accounting agent, BBH calculates the NAV of Shares and calculates
net income and realized capital gains or losses. BBH may be reimbursed by the
Funds for its out-of-pocket expenses.
Distributor. First Trust Portfolios L.P., an affiliate of First Trust, is
the distributor ("FTP" or the "Distributor") and principal underwriter of the
Shares of the Funds. Its principal address is 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187. The Distributor has entered into a Distribution
Agreement with the Trust pursuant to which it distributes Fund Shares. Shares
are continuously offered for sale by the Funds through the Distributor only in
Creation Unit Aggregations, as described in the Prospectus under the heading
"Creation and Redemption of Creation Unit Aggregations."
The Advisor may, from time to time and from its own resources, pay, defray
or absorb costs relating to distribution, including payments out of its own
resources to the Distributor, or to otherwise promote the sale of Shares. The
Advisor's available resources to make these payments include profits from
advisory fees received from the Funds. The services the Advisor may pay for
include, but are not limited to, advertising and attaining access to certain
conferences and seminars, as well as being presented with the opportunity to
address investors and industry professionals through speeches and written
marketing materials.
For the fiscal period ended September 30, 2012, there were no underwriting
commissions with respect to the sale of Fund Shares, and First Trust Portfolios
did not receive compensation on redemptions for the Funds for that period.
12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act (the "Plan") pursuant to which the Funds may reimburse
the Distributor up to a maximum annual rate of 0.25% of their average daily net
assets.
Under the Plan and as required by Rule 12b-1, the Trustees will receive
and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made. With the exception of the Distributor and its
affiliates, no "interested person" of the Trust (as that term is defined in the
- 39 -
1940 Act) and no Trustee of the Trust has a direct or indirect financial
interest in the operation of the Plan or any related agreement.
No such fee is currently paid by a Fund under the Plan, and pursuant to a
contractual agreement, the Funds will not pay 12b-1 fees any time before January
31, 2014.
Aggregations. Fund Shares in less than Creation Unit Aggregations are not
distributed by the Distributor. The Distributor will deliver the Prospectus and,
upon request, this SAI to persons purchasing Creation Unit Aggregations and will
maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor is a broker-dealer registered under the 1934
Act and a member of the Financial Industry Regulatory Authority ("FINRA").
The Distribution Agreement provides that it may be terminated at any time,
without the payment of any penalty, on at least 60 days' written notice by the
Trust to the Distributor (i) by vote of a majority of the Independent Trustees
or (ii) by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Funds. The Distribution Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Distributor may also enter into agreements with participants that
utilize the facilities of the Depository Trust Company (the "DTC Participants"),
which have international, operational, capabilities and place orders for
Creation Unit Aggregations of Fund Shares. Participating Parties (as defined in
""Procedures for Creation of Creation Unit Aggregations" below) shall be DTC
Participants (as defined in "DTC Acts as Securities Depository for Fund Shares"
below).
Index Provider. The Index Provider is not affiliated with the Funds, First
Trust Portfolios or First Trust. Each Fund is entitled to use the Index pursuant
to a sublicensing arrangement by and between the Trust, on behalf of the Fund,
and First Trust which in turn has a license agreement with the Index Provider.
The Funds are not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group,
Inc. or its affiliates (NASDAQ OMX, with its affiliates, are referred to as the
"Corporations"). The Corporations have not passed on the legality or suitability
of, or the accuracy or adequacy of descriptions and disclosures relating to, the
Funds. The Corporations make no representation or warranty, express or implied
to the owners of the Funds or any member of the public regarding the
advisability of investing in securities generally or in the Funds particularly,
or the ability of the NASDAQ Technology Dividend Index to track general stock
market performance. The Corporations' only relationship to First Trust is in the
licensing of the NASDAQ(R), OMX(R), NASDAQ OMX(R), and NASDAQ Technology
Dividend IndexSM registered trademarks, trade names and service marks of the
Corporations and the use of the NASDAQ Technology Dividend Index which is
determined, composed and calculated by NASDAQ OMX without regard to Licensee or
the Funds. NASDAQ OMX has no obligation to take the needs of the Licensee or the
owners of the Funds into consideration in determining, composing or calculating
the NASDAQ Technology Dividend Index. The Corporations are not responsible for
and have not participated in the determination of the timing of, prices at, or
- 40 -
quantities of the Funds to be issued or in the determination or calculation of
the equation by which the Funds are to be converted into cash. The Corporations
have no liability in connection with the administration, marketing or trading of
the Funds.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ TECHNOLOGY DIVIDEND INDEX OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED
BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE NASDAQ TECHNOLOGY DIVIDEND INDEX OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE NASDAQ TECHNOLOGY DIVIDEND INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE
ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT,
OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Exchange. The only relationship that NASDAQ(R) has with First Trust or the
Distributor of the Funds in connection with the Funds is that NASDAQ(R) lists
the Shares of the Funds pursuant to its listing agreement with the Trust.
NASDAQ(R) is not responsible for and has not participated in the determination
of pricing or the timing of the issuance or sale of the Shares of the Funds or
in the determination or calculation of the asset value of the Funds. NASDAQ(R)
has no obligation or liability in connection with the administration, marketing
or trading of the Funds.
ADDITIONAL INFORMATION
Book Entry Only System. The following information supplements and should
be read in conjunction with the Prospectus.
DTC Acts as Securities Depository for Fund Shares. Shares of the Funds are
represented by securities registered in the name of The Depository Trust Company
("DTC") or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of
its participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities,
or certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (the "NYSE")
and FINRA. Access to the DTC system is also available to others such as banks,
- 41 -
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
"Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase and sale of
Shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is effected as follows. Pursuant to a letter agreement between
DTC and the Trust, DTC is required to make available to the Trust upon request
and for a fee to be charged to the Trust a listing of the Shares of the Funds
held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding Shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participants a fair
and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Fund distributions shall be made to DTC or its nominee, as the registered
holder of all Fund Shares. DTC or its nominee, upon receipt of any such
distributions, shall immediately credit DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in Shares of
the Funds as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such Shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to Shares
at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
- 42 -
PROXY VOTING POLICIES AND PROCEDURES
The Board has delegated to First Trust the proxy voting responsibilities
for the Funds and has directed First Trust to vote proxies consistent with the
Funds' best interests. First Trust has engaged the services of ISS Governance
Services, a division of RiskMetrics Group, Inc. ("ISS"), to make recommendations
to First Trust on the voting of proxies relating to securities held by the
Funds. If First Trust manages the assets of a company or its pension plan and
any of First Trust's clients hold any securities of that company, First Trust
will vote proxies relating to such company's securities in accordance with the
ISS recommendations to avoid any conflict of interest. While these guidelines
are not intended to be all-inclusive, they do provide guidance on First Trust's
general voting policies.
Information regarding how the Funds voted proxies (if any) relating to
portfolio securities during the most recent 12-month period ended June 30 will
be available upon request and without charge on the Funds' website at
http://www.ftportfolios.com; and by calling (800) 621-1675 or by accessing the
SEC's website at http://www.sec.gov.
Quarterly Portfolio Schedule. The Trust is required to disclose, after its
first and third fiscal quarters, the complete schedule of the Funds' portfolio
holdings with the SEC on Form N-Q. Forms N-Q for the Trust are available on the
SEC's website at http://www.sec.gov. The Funds' Forms N-Q may also be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. and
information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The Trust's Forms N-Q are available without charge, upon
request, by calling (800) 621-1675 or by writing to First Trust Portfolios L.P.,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Policy Regarding Disclosure of Portfolio Holdings. The Trust has adopted a
policy regarding the disclosure of information about each Fund's portfolio
holdings. The Board of Trustees must approve all material amendments to this
policy. Each Fund's portfolio holdings are publicly disseminated each day the
Fund is open for business through financial reporting and news services,
including publicly accessible Internet websites. In addition, a basket
composition file, which includes the security names and share quantities to
deliver in exchange for Fund Shares, together with estimates and actual cash
components, is publicly disseminated each day the NYSE is open for trading via
the National Securities Clearing Corporation ("NSCC"). The basket represents one
Creation Unit of a Fund. Each Fund's portfolio holdings are also available on
the Funds' website at http://www.ftportfolios.com. The Trust, First Trust, FTP
and BBH will not disseminate non-public information concerning the Trust.
Codes of Ethics. In order to mitigate the possibility that the Funds will
be adversely affected by personal trading, the Trust, First Trust and the
Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These
Codes of Ethics contain policies restricting securities trading in personal
accounts of the officers, Trustees and others who normally come into possession
of information on portfolio transactions. Personnel subject to the Codes of
Ethics may invest in securities that may be purchased or held by the Funds;
however, the Codes of Ethics require that each transaction in such securities be
- 43 -
reviewed by the Chief Compliance Officer or his or her designee. These Codes of
Ethics are on public file with, and are available from, the SEC.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation. The Trust issues and sells Shares of the Funds only in Creation
Unit Aggregations on a continuous basis through the Distributor, without a sales
load, at their NAVs next determined after receipt, on any Business Day (as
defined below), of an order in proper form.
A "Business Day" is any day on which the NYSE is open for business. As of
the date of this SAI, the NYSE observes the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash. The consideration
for purchase of Creation Unit Aggregations of a Fund may consist of (i) cash in
lieu of all or a portion of the Deposit Securities, as defined below, and/or
(ii) a designated portfolio of equity securities determined by First Trust--the
"Deposit Securities"--per each Creation Unit Aggregation constituting a
substantial replication of the stocks included in the underlying index ("Fund
Securities") and generally an amount of cash--the "Cash Component"--computed as
described below. Together, the Deposit Securities and the Cash Component
(including the cash in lieu amount) constitute the "Fund Deposit," which
represents the minimum initial and subsequent investment amount for a Creation
Unit Aggregation of a Fund.
The Cash Component is sometimes also referred to as the Balancing Amount.
The Cash Component serves the function of compensating for any differences
between the NAV per Creation Unit Aggregation and the Deposit Amount (as defined
below). The Cash Component is an amount equal to the difference between the NAV
of Fund Shares (per Creation Unit Aggregation) and the "Deposit Amount"--an
amount equal to the market value of the Deposit Securities and/or cash in lieu
of all or a portion of the Deposit Securities. If the Cash Component is a
positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit
Amount), the creator will deliver the Cash Component. If the Cash Component is a
negative number (i.e., the NAV per Creation Unit Aggregation is less than the
Deposit Amount), the creator will receive the Cash Component.
The Custodian, through the NSCC (discussed below), makes available on each
Business Day, prior to the opening of business of the NYSE (currently 9:30 a.m.,
Eastern Time), the list of the names and the required number of shares of each
Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) for a Fund.
Such Fund Deposit is applicable, subject to any adjustments as described
below, in order to effect creations of Creation Unit Aggregations of a Fund
until such time as the next-announced composition of the Deposit Securities is
made available.
- 44 -
The identity and number of shares of the Deposit Securities required for a
Fund Deposit for a Fund changes as rebalancing adjustments and corporate action
events are reflected within a Fund from time to time by First Trust with a view
to the investment objectives of the Fund. The composition of the Deposit
Securities may also change in response to adjustments to the weighting or
composition of the component stocks of the underlying index. In addition, the
Trust reserves the right to permit or require the substitution of an amount of
cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to
replace any Deposit Security that may not be available, may not be available in
sufficient quantity for delivery or which might not be eligible for trading by
an Authorized Participant (as defined below) or the investor for which it is
acting or other relevant reason. The adjustments described above will reflect
changes known to First Trust on the date of announcement to be in effect by the
time of delivery of the Fund Deposit, in the composition of the underlying index
or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting
the current Deposit Securities of a Fund Deposit, the Custodian, through the
NSCC, also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding
Creation Unit Aggregation of a Fund.
Procedures for Creation of Creation Unit Aggregations. In order to be
eligible to place orders with the Distributor and to create a Creation Unit
Aggregation of a Fund, an entity must be a DTC Participant (see the Book Entry
Only System section), and must have executed an agreement with the Distributor
and transfer agent, with respect to creations and redemptions of Creation Unit
Aggregations ("Participant Agreement") (discussed below), and have international
operational capabilities. A DTC Participant is also referred to as an
"Authorized Participant." Investors should contact the Distributor for the names
of Authorized Participants that have signed a Participant Agreement. All Fund
Shares, however created, will be entered on the records of DTC in the name of
Cede & Co. for the account of a DTC Participant.
All orders to create Creation Unit Aggregations must be received by the
transfer agent no later than the closing time of the regular trading session on
the NYSE ("Closing Time") (ordinarily 4:00 p.m., Eastern Time) in each case on
the date such order is placed in order for creation of Creation Unit
Aggregations to be effected based on the NAV of Shares of a Fund as next
determined on such date after receipt of the order in proper form. In the case
of custom orders, the order must be received by the transfer agent no later than
3:00 p.m. Eastern Time on the trade date. A custom order may be placed by an
Authorized Participant in the event that the Trust permits or requires the
substitution of an amount of cash to be added to the Cash Component to replace
any Deposit Security which may not be available, which may not be available in
sufficient quantity for delivery or which may not be eligible for trading by
such Authorized Participant or the investor for which it is acting or other
relevant reason. The date on which an order to create Creation Unit Aggregations
(or an order to redeem Creation Unit Aggregations, as discussed below) is placed
is referred to as the "Transmittal Date." Orders must be transmitted by an
Authorized Participant by telephone or other transmission method acceptable to
the transfer agent pursuant to procedures set forth in the Participant
Agreement, as described below. Severe economic or market disruptions or changes,
or telephone or other communications failure may impede the ability to reach the
transfer agent or an Authorized Participant.
- 45 -
All orders from investors who are not Authorized Participants to create
Creation Unit Aggregations shall be placed with an Authorized Participant, as
applicable, in the form required by such Authorized Participant. In addition,
the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, e.g., to
provide for payments of cash, when required. Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to create Creation Unit Aggregations of a Fund have to be
placed by the investor's broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those persons placing
orders should ascertain the deadlines applicable to DTC and the Federal Reserve
Bank wire system by contacting the operations department of the broker or
depository institution effectuating such transfer of Deposit Securities and Cash
Component.
Placement of Creation Orders. In order to purchase Creation Units of a
Fund, an Authorized Participant must submit an order to purchase for one or more
Creation Units. All such orders must be received by a Fund's transfer agent in
proper form no later than the close of regular trading on the NYSE (ordinarily
4:00 p.m. Eastern Time) in order to receive that day's closing NAV per share.
Orders must be placed in proper form by or through an Authorized Participant,
which is a DTC Participant, i.e., a subcustodian of the Trust. Deposit
Securities must be delivered to the Trust through DTC or NSCC, and Deposit
Securities which are non-U.S. securities must be delivered to an account
maintained at the applicable local subcustodian of the Trust on or before the
International Contractual Settlement Date, as defined below. If a Deposit
Security is an ADR or similar domestic instrument, it may be delivered to the
Custodian. The Authorized Participant must also pay on or before the
International Contractual Settlement Date immediately available or same-day
funds estimated by Trust to be sufficient to pay the Cash Component next
determined after acceptance of the Creation Order, together with the applicable
Creation Transaction Fee (as defined below) and, if applicable, any operational
processing and brokerage costs, transfer fees or stamp taxes. The "International
Contractual Settlement Date" is the earlier of (i) the date upon which all of
the required Deposit Securities, the Cash Component and any other cash amounts
which may be due are delivered to a Fund or (ii) the latest day for settlement
on the customary settlement cycle in the jurisdiction(s) where any of the
securities of such Fund are customarily traded. A custom order may be placed by
an Authorized Participant in the event that a Fund permits or requires the
substitution of an amount of cash to be added to the Cash Component (if
applicable) to replace any Deposit Security which may not be available in
sufficient quantity for delivery or which may not be eligible for trading by
such Authorized Participant or the investor for which it is acting or any other
relevant reason.
The Authorized Participant must also make available no later than 2:00
p.m., Eastern Time, on the International Contractual Settlement Date, by means
satisfactory to the Trust, immediately-available or same-day funds estimated by
the Trust to be sufficient to pay the Cash Component next determined after
acceptance of the purchase order, together with the applicable purchase
transaction fee. Any excess funds will be returned following settlement of the
issue of the Creation Unit Aggregation.
- 46 -
A Creation Unit Aggregation will not be issued until the transfer of good
title to the Trust of the portfolio of Deposit Securities, the payment of the
Cash Component, the payment of any other cash amounts and the Creation
Transaction Fee (as defined below) have been completed. When the required
Deposit Securities which are U.S. securities have been delivered to the Trust
through DTC or NSCC, and Deposit Securities which are non-U.S. securities have
been delivered to the Custodian and each relevant subcustodian confirms to
Custodian that the required Deposit Securities which are non-U.S. securities
(or, when permitted in the sole discretion of Trust, the cash in lieu thereof)
have been delivered to the account of the relevant subcustodian, the Custodian
shall notify the Distributor and the transfer agent which, acting on behalf of
the Trust, will issue and cause the delivery of the Creation Unit Aggregations.
The Trust may in its sole discretion permit or require the substitution of an
amount of cash (i.e., a "cash in lieu" amount) to be added to the Cash Component
to replace any Deposit Security which may not be available in sufficient
quantity for delivery or for other similar reasons. If the Distributor, acting
on behalf of the Trust, determines that a "cash in lieu" amount will be
accepted, the Distributor will notify the Authorized Participant and the
transfer agent, and the Authorized Participant shall deliver, on behalf of
itself or the party on whose behalf it is acting, the "cash in lieu" amount,
with any appropriate adjustments as advised by the Trust as discussed below.
In the event that an order for a Creation Unit is incomplete on the
International Contractual Settlement Date because certain or all of the Deposit
Securities are missing, the Trust may issue a Creation Unit notwithstanding such
deficiency in reliance on the undertaking of the Authorized Participant to
deliver the missing Deposit Securities as soon as possible, which undertaking
shall be secured by an Additional Cash Deposit with respect to undelivered
Deposit Securities. The Trust may permit, in its discretion, the Authorized
Participant to substitute a different security in lieu of depositing some or all
of the Deposit Securities. Substitution of cash or a different security might be
permitted or required, for example, because one or more Deposit Securities may
be unavailable in the quantity needed or may not be eligible for trading by the
Authorized Participant due to local trading restrictions or other restrictions.
To the extent contemplated by the applicable Participant Agreement,
Creation Unit Aggregations of the Funds will be issued to such Authorized
Participant notwithstanding the fact that the corresponding Fund Deposits have
not been received in part or in whole, in reliance on the undertaking of the
Authorized Participant to deliver the missing Deposit Securities as soon as
possible, which undertaking shall be secured by such Authorized Participant's
delivery and maintenance of collateral consisting of cash in the form of U.S.
dollars in immediately available funds having a value (marked to market daily)
at least equal to 115% which First Trust may change from time to time of the
value of the missing Deposit Securities. Such cash collateral must be delivered
no later than 2:00 p.m., Eastern Time, on the contractual settlement date. The
Participant Agreement will permit the Funds to buy the missing Deposit
Securities at any time and will subject the Authorized Participant to liability
for any shortfall between the cost to the Trust of purchasing such securities
and the value of the collateral.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves
the absolute right to reject a creation order transmitted to it by the
Distributor with respect to a Fund if: (i) the order is not in proper form; (ii)
the investor(s), upon obtaining the Fund Shares ordered, would own 80% or more
- 47 -
of the currently outstanding shares of the Fund; (iii) the required Fund Deposit
is not delivered; (iv) acceptance of the Deposit Securities would have certain
adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would,
in the opinion of the Trust, be unlawful; (vi) acceptance of the Fund Deposit
would otherwise have an adverse effect on the Trust, the Fund or the rights of
Beneficial Owners; or (vii) in the event that circumstances outside the control
of the Trust or the Fund make it for all practical purposes impossible to
process creation orders. Examples of such circumstances include acts of God or
public service or utility problems such as fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the Fund, the
Trust, First Trust, the Distributor, the transfer agent, DTC, NSCC, the
Custodian or sub-custodian or any other participant in the creation process, and
similar extraordinary events. In addition, an order may be rejected for
practical reasons such as the imposition by a foreign government or a regulatory
body of controls, or other monetary, currency or trading restrictions that
directly affect the portfolio securities held or systems failures involving
computer or other information systems affecting any relevant sub-custodian. The
Distributor shall notify a prospective creator of a Creation Unit and/or the
Authorized Participant acting on behalf of such prospective creator of its
rejection of the order of such person. The Trust, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits,
nor shall any of them incur any liability for the failure to give any such
notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility, and acceptance for deposit of
any securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
Creation Transaction Fee. Purchasers of Creation Units must pay a creation
transaction fee (the "Creation Transaction Fee") that is currently $500 for the
First Trust NASDAQ Technology Dividend Index Fund and $1,000 for the Multi-Asset
Diversified Income Index Fund. The Creation Transaction Fee is applicable to
each purchase transaction regardless of the number of Creation Units purchased
in the transaction. The Creation Transaction Fee may vary and is based on the
composition of the securities included in a Fund's portfolio and the countries
in which the transactions are settled. The Creation Transaction Fee may increase
or decrease as a Fund's portfolio is adjusted to conform to changes in the
composition of the Index. The price for each Creation Unit will equal the daily
NAV per Share 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 or stamp taxes. When a Fund permits an Authorized
Participant to substitute cash or a different security in lieu of depositing one
or more of the requisite Deposit Securities, the Authorized Participant may also
be assessed an amount to cover the cost of purchasing the Deposit Securities
and/or disposing of the substituted securities, including 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 such Deposit
Securities and/or substitute securities.
- 48 -
Shares of a Fund may be issued in advance of receipt of all Deposit
Securities subject to various conditions including a requirement to maintain on
deposit with the Fund cash at least equal to 115% of the market value of the
missing Deposit Securities.
Redemption of Fund Shares In Creation Unit Aggregations. Fund Shares may
be redeemed only in Creation Unit Aggregations at their NAV next determined
after receipt of a redemption request in proper form by a Fund through the
transfer agent and only on a Business Day. A Fund will not redeem Shares in
amounts less than Creation Unit Aggregations. Beneficial Owners must accumulate
enough Shares in the secondary market to constitute a Creation Unit Aggregation
in order to have such Shares redeemed by the Trust. Shares generally will be
redeemed in Creation Unit Aggregations in exchange for a particular portfolio of
securities ("Fund Securities"). A redeeming beneficial owner must maintain
appropriate security arrangements with a broker-dealer, bank or other custody
provider in each jurisdiction in which any of the portfolio securities are
customarily traded. If such arrangements cannot be made, or it is not possible
to effect deliveries of the portfolio securities in a particular jurisdiction or
under certain other circumstances (for example, holders may incur unfavorable
tax treatment in some countries if they are entitled to receive "in-kind"
redemption proceeds), Fund Shares may be redeemed for cash at the discretion of
First Trust. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly of a
Creation Unit Aggregation. Investors should expect to incur customary brokerage
and other costs in connection with assembling a sufficient number of Fund Shares
to constitute a redeemable Creation Unit Aggregation.
With respect to the Funds, the Custodian, through the NSCC, makes
available prior to the opening of business on the NYSE (currently 9:30 a.m.
Eastern Time) on each Business Day, the identity of the Fund Securities that
will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as described below) on that day. Fund
Securities received on redemption may not be identical to Deposit Securities
that are applicable to creations of Creation Unit Aggregations.
Unless cash redemptions are available or specified for a Fund, the
redemption proceeds for a Creation Unit Aggregation generally consist of Fund
Securities--as announced on the Business Day of the request for redemption
received in proper form--plus or minus cash in an amount equal to the difference
between the NAV of the Creation Unit Aggregation being redeemed, as next
determined after a receipt of a request in proper form, and the value of the
Fund Securities (the "Cash Redemption Amount"), less the applicable Redemption
Transaction Fee as listed below and, if applicable, any operational processing
and brokerage costs, transfer fees or stamp taxes. In the event that the Fund
Securities have a value greater than the NAV of the Fund Shares, a compensating
cash payment equal to the difference plus, the applicable Redemption Transaction
Fee and, if applicable, any operational processing and brokerage costs, transfer
fees or stamp taxes is required to be made by or through an Authorized
Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment postponed
(i) for any period during which the NYSE is closed (other than customary weekend
and holiday closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency exists
- 49 -
as a result of which disposal of the Shares of a Fund or determination of the
Fund's NAV is not reasonably practicable; or (iv) in such other circumstances as
is permitted by the SEC.
Redemption Transaction Fee. Parties redeeming Creation Units must pay a
redemption transaction fee (the "Redemption Transaction Fee") that is currently
$500 for the First Trust NASDAQ Technology Dividend Index Fund and $1,000 for
the Multi-Asset Diversified Income Index Fund. The Redemption Transaction Fee is
applicable to each redemption transaction regardless of the number of Creation
Units redeemed in the transaction. The Redemption Transaction Fee may vary and
is based on the composition of the securities included in a Fund's portfolio and
the countries in which the transactions are settled. The Redemption Transaction
Fee may increase or decrease as a Fund's portfolio is adjusted to conform to
changes in the composition of the Index. The Funds reserve the right to effect
redemptions in cash. A shareholder may request a cash redemption in lieu of
securities; however, a Fund may, in its discretion, reject any such request.
Investors will also bear the costs of transferring Fund Securities from the
Trust to their account or on their order. 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 Aggregation may also be assessed an
amount to cover the cost of such services.
Placement of Redemption Orders. Orders to redeem Creation Unit
Aggregations must be delivered through an Authorized Participant that has
executed a Participant Agreement. Investors other than Authorized Participants
are responsible for making arrangements for a redemption request to be made
through an Authorized Participant. An order to redeem Creation Unit Aggregations
of a Fund is deemed received by the Trust on the Transmittal Date if: (i) such
order is received by BBH (in its capacity as transfer agent) not later than the
Closing Time on the Transmittal Date; (ii) such order is accompanied or followed
by the requisite number of shares of the Fund specified in such order, which
delivery must be made through DTC to BBH; and (iii) all other procedures set
forth in the Participant Agreement are properly followed.
In connection with taking delivery of shares of Fund Securities upon
redemption of shares of the Fund, a redeeming Beneficial Owner, or Authorized
Participant acting on behalf of such Beneficial Owner must maintain appropriate
security arrangements with a qualified broker-dealer, bank or other custody
provider in each jurisdiction in which any of the Fund Securities are
customarily traded, to which account such Fund Securities will be delivered.
To the extent contemplated by an Authorized Participant's agreement, in
the event the Authorized Participant has submitted a redemption request in
proper form but is unable to transfer all or part of the Creation Unit
Aggregation to be redeemed to the Funds' transfer agent, the transfer agent will
nonetheless accept the redemption request in reliance on the undertaking by the
Authorized Participant to deliver the missing shares as soon as possible. Such
undertaking shall be secured by the Authorized Participant's delivery and
maintenance of collateral consisting of cash having a value (marked to market
daily) at least equal to 115%, which First Trust may change from time to time,
of the value of the missing shares.
- 50 -
The current procedures for collateralization of missing shares require,
among other things, that any cash collateral shall be in the form of U.S.
dollars in immediately available funds and shall be held by BBH and marked to
market daily, and that the fees of BBH and any sub-custodians in respect of the
delivery, maintenance and redelivery of the cash collateral shall be payable by
the Authorized Participant. The Authorized Participant's agreement will permit
the Trust, on behalf of the affected Fund, to purchase the missing shares or
acquire the Deposit Securities and the Cash Component underlying such shares at
any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such shares, Deposit
Securities or Cash Component and the value of the collateral.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received upon redemption will be made by BBH
according to the procedures set forth in this SAI under "Determination of NAV"
computed on the Business Day on which a redemption order is deemed received by
the Trust. Therefore, if a redemption order in proper form is submitted to BBH
by a DTC Participant not later than Closing Time on the Transmittal Date, and
the requisite number of Shares of the relevant Fund are delivered to BBH prior
to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash
Redemption Amount to be delivered will be determined by BBH on such Transmittal
Date. If, however, a redemption order is submitted to BBH by a DTC Participant
not later than the Closing Time on the Transmittal Date but either (i) the
requisite number of Shares of the relevant Fund are not delivered by the DTC
Cut-Off-Time, as described above, on such Transmittal Date, or (ii) the
redemption order is not submitted in proper form, then the redemption order will
not be deemed received as of the Transmittal Date. In such case, the value of
the Fund Securities and the Cash Redemption Amount to be delivered/received will
be computed on the Business Day that such order is deemed received by the Trust,
i.e., the Business Day on which the shares of the relevant Fund are delivered
through DTC to BBH by the DTC Cut-Off-Time on such Business Day pursuant to a
properly submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the
Trust may in its discretion exercise its option to redeem such Fund Shares in
cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption
in cash that a Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the NAV of its Fund Shares based
on the NAV of Shares of the relevant Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee and
additional charge for requested cash redemptions specified above, to offset the
Trust's brokerage and other transaction costs associated with the disposition of
Fund Securities). A Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer cash in lieu of some securities added to the
Cash Redemption Amount, but in no event will the total value of the securities
delivered and the cash transmitted differ from the NAV.
Redemptions of Fund Shares for Fund Securities will be subject to
compliance with applicable federal and state securities laws and a Fund (whether
or not it otherwise permits cash redemptions) reserves the right to redeem
Creation Unit Aggregations for cash to the extent that the Trust could not
lawfully deliver specific Fund Securities upon redemptions or could not do so
without first registering the Fund Securities under such laws. An Authorized
- 51 -
Participant or an investor for which it is acting subject to a legal restriction
with respect to a particular stock included in the Fund Securities applicable to
the redemption of a Creation Unit Aggregation may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming Beneficial Owner
of the Fund Shares to complete an order form or to enter into agreements with
respect to such matters as compensating cash payment, beneficial ownership of
Shares or delivery instructions.
Because the Portfolio Securities of a Fund may trade on the relevant
exchange(s) on days that the listing exchange for the Fund is closed or are
otherwise not Business Days for the Fund, shareholders may not be able to redeem
their shares of such Fund, or purchase and sell shares of such Fund on the
listing exchange for the Fund, on days when the NAV of the Fund could be
significantly affected by events in the relevant foreign markets.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax
consequences of owning Shares of a Fund. This section is current as of the date
of the Prospectus. Tax laws and interpretations change frequently, and these
summaries do not describe all of the tax consequences to all taxpayers. For
example, these summaries generally do not describe your situation if you are a
corporation, a non-U.S. person, a broker-dealer, or other investor with special
circumstances. In addition, this section does not describe your state, local or
foreign tax consequences.
This federal income tax summary is based in part on the advice of counsel
to the Funds. The Internal Revenue Service could disagree with any conclusions
set forth in this section. In addition, our counsel was not asked to review, and
has not reached a conclusion with respect to the federal income tax treatment of
the assets to be deposited in the Funds. This may not be sufficient for
prospective investors to use for the purpose of avoiding penalties under federal
tax law.
As with any investment, prospective investors should seek advice based on
their individual circumstances from their own tax advisor.
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, each Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies, or net income derived from interests in certain publicly traded
partnerships; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of each Fund's assets is
represented by cash and cash items (including receivables), U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer generally limited for
- 52 -
the purposes of this calculation to an amount not greater than 5% of the value
of each Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. government securities or
the securities of other regulated investment companies) of any one issuer, or
two or more issuers which a Fund controls which are engaged in the same, similar
or related trades or businesses, or the securities of one or more of certain
publicly traded partnerships; and (c) distribute at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and net short-term capital gains in excess of net long-term capital losses) and
at least 90% of its net tax-exempt interest income each taxable year. There are
certain exceptions for failure to qualify if the failure is for reasonable cause
or is de minimis, and certain corrective action is taken and certain tax
payments are made by a Fund.
As regulated investment companies, the Funds generally will not be subject
to U.S. federal income tax on their investment company taxable income (as that
term is defined in the Code, but without regard to the deduction for dividends
paid) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that they distribute to shareholders. Each
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gain. If a Fund
retains any net capital gain or investment company taxable income, it will
generally be subject to federal income tax at regular corporate rates on the
amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, each Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98.2% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. In order to prevent
application of the excise tax, the Funds intend to make its distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by a Fund in October, November or December with a record date in such a month
and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Subject to certain reasonable cause and de minimis exceptions, if a Fund
failed to qualify as a regulated investment company or failed to satisfy the 90%
distribution requirement in any taxable year, the Fund would be taxed as an
ordinary corporation on its taxable income (even if such income were distributed
to its shareholders) and all distributions out of earnings and profits would be
taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Funds' investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, certain ordinary income distributions received from a Fund may
be taxed at capital gains tax rates. In particular, ordinary income dividends
- 53 -
received by an individual shareholder from regulated investment companies such
as the Funds are generally taxed at the same rates that apply to net capital
gain, provided that certain holding period requirements are satisfied and
provided the dividends are attributable to qualifying dividends received by each
Fund itself. Dividends received by the Funds from REITs and foreign corporations
are qualifying dividends eligible for this lower tax rate only in certain
circumstances. The Funds will provide notice to its shareholders of the amount
of any distributions that may be taken into account as a dividend which is
eligible for the capital gains tax rates. The Funds cannot make any guarantees
as to the amount of any distribution which will be regarded as a qualifying
dividend.
Under the "Health Care and Education Reconciliation Act of 2010," income
from a Fund may also be subject to a new 3.8% "Medicare tax" imposed for taxable
years beginning after 2012. This tax will generally apply to net investment
income if the taxpayer's adjusted gross income exceeds certain threshold
amounts, which are $250,000 in the case of married couples filing joint returns
and $200,000 in the case of single individuals.
A corporation that owns Shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
Funds because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on Shares that are attributable to qualifying dividends
received by the Funds from certain domestic corporations may be reported by the
Funds as being eligible for the dividends received deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly reported as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund Shares. Shareholders
receiving distributions in the form of additional Shares, rather than cash,
generally will have a cost basis in each such Share equal to the value of a
Share of a Fund on the reinvestment date. A distribution of an amount in excess
of a Fund's current and accumulated earnings and profits will be treated by a
shareholder as a return of capital which is applied against and reduces the
shareholder's basis in his or her Shares. To the extent that the amount of any
such distribution exceeds the shareholder's basis in his or her Shares, the
excess will be treated by the shareholder as gain from a sale or exchange of the
Shares.
Shareholders will be notified annually as to the U.S. federal income tax
status of distributions, and shareholders receiving distributions in the form of
additional Shares will receive a report as to the value of those Shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of Shares of the Funds, which a
shareholder holds as a capital asset, such a shareholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
shareholder's holding period for the Shares. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the Shares have been held for more than
one year.
- 54 -
Any loss realized on a sale or exchange will be disallowed to the extent
that Shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of Shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund Shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gain received by the
shareholder with respect to such Shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If a shareholder exchanges equity securities for Creation Units the
shareholder will generally recognize a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the
time and the shareholder's aggregate basis in the securities surrendered and the
Cash Component paid. If a shareholder exchanges Creation Units for equity
securities, then the shareholder will generally recognize a gain or loss equal
to the difference between the shareholder's basis in the Creation Units and the
aggregate market value of the securities received and the Cash Redemption
Amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing "wash sales,"
or on the basis that there has been no significant change in economic position.
NATURE OF FUND INVESTMENTS
Certain of the Funds' investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Funds to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions.
FUTURES CONTRACTS AND OPTIONS
The Funds' transactions in Futures Contracts and options will be subject
to special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Funds (i.e., may affect whether
gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Funds and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require the Funds to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), and (b) may cause the Funds to recognize income
without receiving cash with which to make distributions in amounts necessary to
- 55 -
satisfy the 90% distribution requirement for qualifying to be taxed as a
regulated investment company and the distribution requirements for avoiding
excise taxes.
INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS
If a Fund holds an equity interest in any "passive foreign investment
companies" ("PFICs"), which are generally certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, certain rents and royalties or capital gains) or that hold
at least 50% of their assets in investments producing such passive income, the
Fund could be subject to U.S. federal income tax and additional interest charges
on gains and certain distributions with respect to those equity interests, even
if all the income or gain is timely distributed to its Shareholders. A Fund will
not be able to pass through to its Shareholders any credit or deduction for such
taxes. A Fund may be able to make an election that could ameliorate these
adverse tax consequences. In this case, a Fund would recognize as ordinary
income any increase in the value of such PFIC shares, and as ordinary loss any
decrease in such value to the extent it did not exceed prior increases included
in income. Under this election, a Fund might be required to recognize in a year
income in excess of its distributions from PFICs and its proceeds from
dispositions of PFIC stock during that year, and such income would nevertheless
be subject to the distribution requirement and would be taken into account for
purposes of the 4% excise tax (described above). Dividends paid by PFICs will
not be treated as qualified dividend income.
BACKUP WITHHOLDING
The Funds may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide the Funds with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. This withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
In addition to the rules described in this section concerning the
potential imposition of withholding on distributions to non-U.S. persons,
distributions after December 31, 2013, to non-U.S. persons that are "financial
institutions" may be subject to a withholding tax of 30% unless an agreement is
in place between the financial institution and the U.S. Treasury to collect and
disclose information about accounts, equity investments, or debt interests in
the financial institution held by one or more U.S. persons or the institution is
a resident in a jurisdiction that has entered into such an agreement with the
- 56 -
U.S. Treasury. For these purpose, a "financial institution" means any entity
that (i) accepts deposits in the ordinary course of a banking or similar
business, (ii) holds financial assets for the account of others as a substantial
portion of its business, or (iii) is engage (or holds itself out as being
engaged) primarily in the business of investing, reinvesting or trading in
securities, partnership interests, commodities or any interest (including a
futures contract or option) in such securities, partnership interests or
commodities. Dispositions of shares by such persons may be subject to such
withholding after December 31, 2016.
Distributions to non-financial non-U.S. entities (other than publicly
traded foreign entities, entities owned by residents of U.S. possessions,
foreign governments, international organizations, or foreign central banks)
after December 31, 2013, will also be subject to a withholding tax of 30% if the
entity does not certify that the entity does not have any substantial U.S.
owners or provide the name, address and TIN of each substantial U.S. owner.
Dispositions of shares by such persons may be subject to such withholding after
December 31, 2016.
Income Not Effectively Connected. If the income from a Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
shareholder, distributions of investment company taxable income will generally
be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by a Fund
which are properly reported by the Fund as undistributed capital gains will not
be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the
non-U.S. shareholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would be subject to U.S. income tax on his or her worldwide
income at the, graduated rates applicable to U.S. citizens, rather than the 30%
U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien
individual, the Funds may be required to withhold U.S. income tax from
distributions of net capital gain unless the non-U.S. shareholder certifies his
or her non-U.S. status under penalties of perjury or otherwise establishes an
exemption. If a non-U.S. shareholder is a nonresident alien individual, any gain
such shareholder realizes upon the sale or exchange of such shareholder's shares
of the Funds in the United States will ordinarily be exempt from U.S. tax unless
the gain is U.S. source income and such shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements.
In the case of dividends with respect to taxable years of a Fund
beginning prior to 2014, distributions from the Trust that are properly reported
by the Fund as an interest-related dividend attributable to certain interest
income received by the Fund or as a short-term capital gain dividend
attributable to certain net short-term capital gain income received by the Fund
may not be subject to U.S. federal income taxes, including withholding taxes
when received by certain foreign investors, provided that the Fund makes certain
- 57 -
elections and certain other conditions are met. In addition, capital gains
distributions attributable to gains from U.S. real property interests (including
certain U.S. real property holding corporations) will generally be subject to
United States withholding tax and will give rise to an obligation on the part of
the foreign shareholder to file a United States tax return.
Income Effectively Connected. If the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by a non-U.S. shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by a Fund which are properly reported as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Funds will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Non-U.S.
corporate shareholders may also be subject to the branch profits tax imposed by
the Code. The tax consequences to a non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Non-U.S. shareholders are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Funds.
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Funds.
DETERMINATION OF NAV
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Net Asset Value."
The per share NAV of a Fund is determined by dividing the total value of
the securities and other assets, less liabilities, by the total number of Shares
outstanding. Under normal circumstances, daily calculation of the NAV will
utilize the last closing sale price of each security held by the Fund at the
close of the market on which such security is principally listed. In determining
NAV, portfolio securities for a Fund for which accurate market quotations are
readily available will be valued by the Fund accounting agent as follows:
(1) Common stocks and other equity securities listed on any
national or foreign exchange other than NASDAQ(R) and the London Stock
Exchange Alternative Investment Market ("AIM") will be valued at the last
sale price on the business day as of which such value is being determined.
Securities listed on NASDAQ(R) or AIM are valued at the official closing
price on the business day as of which such value is being determined. If
there has been no sale on such day, or no official closing price in the
case of securities traded on NASDAQ(R) and AIM, the securities are valued
at the mean of the most recent bid and ask prices on such day. Portfolio
securities traded on more than one securities exchange are valued at the
last sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
- 58 -
(2) Securities traded in the over-the-counter market are valued at
their closing bid prices.
(3) Exchange-traded options and Futures Contracts will be valued at
the closing price in the market where such contracts are principally
traded. If no closing price is available, exchange-traded options and
futures contracts will be valued at the mean between the last bid and
asked price. Over-the-counter options and Futures Contracts will be valued
at their closing bid prices.
(4) Forward foreign currency exchange contracts which are traded in
the United States on regulated exchanges will be valued by calculating the
mean between the last bid and asked quotations supplied to a pricing
service by certain independent dealers in such contracts.
In addition, the following types of securities will be valued as follows:
(1) Fixed-income securities with a remaining maturity of 60 days or
more will be valued by the fund accounting agent using a pricing service.
When price quotes are not available, fair value is based on prices of
comparable securities.
(2) Fixed-income securities maturing within 60 days are valued by
the Fund accounting agent on an amortized cost basis.
(3) Repurchase agreements will be valued as follows. Overnight
repurchase agreements will be valued at cost. Term repurchase agreements
(i.e., those whose maturity exceeds seven days) will be valued by First
Trust at the average of the bid quotations obtained daily from at least
two recognized dealers.
The value of any portfolio security held by a Fund for which market
quotations are not readily available will be determined by First Trust in a
manner that most fairly reflects fair value of the security on the valuation
date, based on a consideration of all available information.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board of Trustees or its delegate
at fair value. These securities generally include but are not limited to,
restricted securities (securities which may not be publicly sold without
registration under the 1933 Act) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of Fund NAV (as may be the case in foreign markets on
which the security is primarily traded) or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's "fair value." As a general
principle, the current "fair value" of an issue of securities would appear to be
the amount which the owner might reasonably expect to receive for them upon
their current sale. A variety of factors may be considered in determining the
fair value of such securities.
- 59 -
Valuing a Fund's investments using fair value pricing will result in using
prices for those investments that may differ from current market valuations. Use
of fair value prices and certain current market valuations could result in a
difference between the prices used to calculate a Fund's net asset value and the
prices used by the Index, which, in turn, could result in a difference between a
Fund's performance and the performance of the Index.
Because foreign markets may be open on different days than the days during
which a shareholder may purchase the Shares of a Fund, the value of a Fund's
investments may change on the days when shareholders are not able to purchase
the Shares of the Fund.
The value of assets denominated in foreign currencies is converted into
U.S. dollars using exchange rates in effect at the time of valuation. Any use of
a different rate from the rates used by the Index may adversely affect a Fund's
ability to track the Index.
A Fund may suspend the right of redemption for the Fund only under the
following unusual circumstances: (a) when the NYSE is closed (other than
weekends and holidays) or trading is restricted; (b) when trading in the markets
normally utilized is restricted, or when an emergency exists as determined by
the SEC so that disposal of the Fund's investments or determination of its net
assets is not reasonably practicable; or (c) during any period when the SEC may
permit.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Dividends, Distributions and
Taxes."
General Policies. Dividends from net investment income, if any, are
declared and paid quarterly by First Trust NASDAQ Technology Dividend Index Fund
and monthly by the Multi-Asset Diversified Income Index Fund. Distributions of
net realized securities gains, if any, generally are declared and paid once a
year, but the Trust may make distributions on a more frequent basis. The Trust
reserves the right to declare special distributions if, in its reasonable
discretion, such action is necessary or advisable to preserve the status of each
Fund as a regulated investment company or to avoid imposition of income or
excise taxes on undistributed income.
Dividends and other distributions of Fund Shares are distributed, as
described below, on a pro rata basis to Beneficial Owners of such Shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Funds.
Dividend Reinvestment Service. No reinvestment service is provided by the
Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of the Funds for reinvestment
of their dividend distributions. Beneficial Owners should contact their brokers
in order to determine the availability and costs of the service and the details
of participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
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dividend distributions of both income and realized gains will be automatically
reinvested in additional whole Shares of each Fund purchased in the secondary
market.
MISCELLANEOUS INFORMATION
Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois
60603, is counsel to the Trust.
Independent Registered Public Accounting Firm. Deloitte & Touche LLP, 111
South Wacker Drive, Chicago, Illinois 60606, serves as the Funds' independent
registered public accounting firm. The firm audits each Fund's financial
statements and performs other related audit services.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto for the Funds,
contained in the Annual Report to Shareholders dated September 30, 2012, are
incorporated by reference into this Statement of Additional Information and have
been audited by Deloitte & Touche LLP, independent registered public accounting
firm, whose report also appears in the Annual Report and are also incorporated
by reference herein. No other parts of the Annual Report are incorporated by
reference herein. The Annual Report is available without charge by calling (800)
621-1675 or by visiting the SEC's website at http://www.sec.gov.
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EXHIBIT A
PERCENTAGE OF
FUND NAME AND ADDRESS OF OWNER RECORD OWNERSHIP
First Trust NASDAQ Technology Dividend Index Fund
First Clearing L.L.C. (1) 22.93%
Morgan Stanley Smith Barney LLC (2) 12.62%
National Financial Services Corporation (3) 12.43%
UBS Financial Services Inc. (4) 9.81%
Merrill Lynch Sfkpg (5) 5.96%
Stifel, Nicolaus & Company Incorporated (6) 5.37%
Multi-Asset Diversified Income Index Fund
Morgan Stanley Smith Barney LLC 24.89%
Merrill Lynch Sfkpg 10.76%
UBS Financial Services Inc. 10.39%
Raymond James & Associates, Inc. (7) 7.29%
National Financial Services Corporation 5.58%
|
(1) First Clearing L.L.C., 10700 Wheat First Drive, Glen Allen, VA 23060
(2) Morgan Stanley Smith Barney LLC, 1585 Broadway, New York, NY 10036
(3) National Financial Services Corporation, 200 Liberty Street, New York
City, NY 10281
(4) UBS Financial Services Inc., 1000 Harbor Boulevard, Weehawken, NJ 07086
(5) Merrill Lynch Sfkpg, 101 Hudson St., 9th Floor, Jersey City, NJ 07302
(6) Stifel, Nicolaus & Company, Incorporated, 501 N. Broadway, 7th Floor, St.
Louis, MO 63102
(7) Raymond James & Associates, Inc., 880 Carilion Parkway, PO Box 12479, St.
Petersburg, FL 33716
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