UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22559
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First Trust Exchange-Traded Fund IV
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2016
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549-1090. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORT TO STOCKHOLDERS.
The registrant's annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
FIRST TRUST
First Trust Exchange-Traded Fund IV
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First Trust North American
Energy Infrastructure Fund
(EMLP)
Annual Report
For the Year Ended
October 31, 2016
Energy Income Partners, LLC
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TABLE OF CONTENTS
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 9
Statement of Operations...................................................... 10
Statements of Changes in Net Assets.......................................... 11
Financial Highlights......................................................... 12
Notes to Financial Statements................................................ 13
Report of Independent Registered Public Accounting Firm...................... 19
Additional Information....................................................... 20
Board of Trustees and Officers............................................... 25
Privacy Policy............................................................... 27
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Energy Income Partners, LLC ("EIP" or the
Sub-Advisor) and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust North American Energy Infrastructure Fund; hereinafter
referred to as the "Fund") to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. When evaluating the information included in this report, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect the judgment of the Advisor and/or Sub-Advisor and their respective
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor and/or Sub-Advisor are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. The material risks of
investing in the Fund are spelled out in the prospectus, the statement of
additional information, this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust North American Energy
Infrastructure Fund.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (6/20/12) Inception (6/20/12)
10/31/16 to 10/31/16 to 10/31/16
FUND PERFORMANCE
NAV 12.01% 8.59% 43.30%
Market Price 11.90% 8.61% 43.39%
INDEX PERFORMANCE
Blended Benchmark(1) 8.71% 6.32% 30.65%
S&P 500(R) Index 4.51% 13.24% 72.08%
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Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
-----------------------------
(1) The Blended Benchmark consists of the following two indices: 50% of the
Philadelphia Stock Exchange Utility Index which is a market capitalization
weighted index composed of geographically diverse public U.S. utility
stocks; and 50% of the Alerian MLP Total Return Index which is a
float-adjusted, capitalization-weighted composite of the 50 most prominent
energy Master Limited Partnerships (MLPs). Indices are unmanaged and an
investor cannot invest directly in an index. All index returns assume that
distributions are reinvested when they are received.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP) (CONTINUED)
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Pipeline 48.59%
Electric Power 38.47
Propane 3.99
Natural Gas Utility 3.60
Coal 2.68
Gathering & Processing 1.85
Other 0.82
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Total 100.00%
=======
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% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
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Enbridge Energy Management, LLC 8.72%
TransCanada Corp. 6.74
Enterprise Products Partners, L.P. 4.22
Enbridge Income Fund Holdings, Inc. 3.29
American Electric Power Co., Inc. 3.20
NextEra Energy, Inc. 3.10
Williams (The) Cos., Inc. 2.98
Eversource Energy 2.95
NextEra Energy Partners, L.P. 2.69
Public Service Enterprise Group, Inc. 2.60
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Total 40.49%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
JUNE 20, 2012 - OCTOBER 31, 2016
First Trust North American Blended S&P 500(R)
Energy Infrastructure Fund Benchmark(1) Index
6/20/12 $10,000 $10,000 $10,000
10/31/12 10,690 10,609 10,495
4/30/13 12,380 12,218 12,009
10/31/13 12,138 12,041 13,347
4/30/14 13,343 13,356 14,463
10/31/14 14,861 14,357 15,652
4/30/15 15,005 13,778 16,340
10/31/15 12,793 12,019 16,466
4/30/16 13,004 12,510 16,537
10/31/16 14,330 13,065 17,208
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period June 21, 2012 (commencement
of trading) through October 31, 2016. 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. Data presented
represents past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
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0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
6/21/12 - 10/31/12 78 4 0 0 9 0 0 0
11/1/12 - 10/31/13 226 2 0 0 24 0 0 0
11/1/13 - 10/31/14 231 0 0 0 21 0 0 0
11/1/14 - 10/31/15 158 0 0 0 93 0 0 0
11/1/15 - 10/31/16 213 0 0 0 39 0 0 0
Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
ENERGY INCOME PARTNERS, LLC
Energy Income Partners, LLC ("EIP" or the "Sub-Advisor"), Westport, CT, serves
as the investment sub-advisor to the First Trust North American Energy
Infrastructure Fund ("EMLP" or the "Fund"). EIP was founded in 2003 and provides
professional asset management services in the area of energy-related master
limited partnerships ("MLPs") and other high-payout securities such as pipeline
companies, power utilities, Yield-Co's, and energy infrastructure real estate
investment trusts ("REITs"). EIP mainly focuses on investments in energy-related
infrastructure assets such as pipelines, power transmission and distribution,
petroleum storage and terminals that receive fee-based or regulated income from
their corporate and individual customers. As of October 31, 2016, EIP has
approximately $5.3 billion of assets under management or supervision. Private
funds advised by EIP include a partnership for U.S. high net worth individuals
and an open-end mutual fund. EIP also manages separately managed accounts and
provides its model portfolio to unified managed accounts. Finally, in addition
to the Fund, EIP serves as a sub-advisor to four closed-end management
investment companies, to a sleeve of an actively managed exchange-traded fund
and to a sleeve of a series of a variable insurance trust. EIP is an investment
advisor registered with the Securities and Exchange Commission.
PORTFOLIO MANAGEMENT TEAM
JAMES J. MURCHIE - CO-PORTFOLIO MANAGER, FOUNDER AND CEO OF ENERGY INCOME
PARTNERS, LLC
EVA PAO - CO-PORTFOLIO MANAGER, PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
JOHN TYSSELAND - CO-PORTFOLIO MANAGER, PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
COMMENTARY
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND
The Fund's investment objective is to seek total return. The Fund pursues its
objective by investing, under normal market conditions, at least 80% of its net
assets (including investment borrowings) in equity securities of companies
engaged in the energy infrastructure sector. These companies principally include
publicly traded master limited partnerships and limited liability companies
taxed as partnerships ("MLPs"), MLP affiliates, Canadian income equities,
pipeline companies, utilities and other companies that derive at least 50% of
their revenues from operating or providing services in support of infrastructure
assets such as pipelines, power transmission and petroleum and natural gas
storage in the petroleum, natural gas and power generation industries
(collectively, "Energy Infrastructure Companies"). The Fund will be generally
concentrated in Energy Infrastructure Companies. Under normal market conditions,
the Fund will invest at least 80% of its net assets (including investment
borrowings) in equity securities of companies headquartered or incorporated in
the United States and Canada. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may not be appropriate for all
investors.
MARKET RECAP
As measured by the Alerian MLP Total Return Index ("MLP Index") and the
Philadelphia Stock Exchange Utility Index ("UTY Index"), the total return for
energy-related MLPs and utilities for the fiscal year ended October 31, 2016 was
-1.80% and 18.48%, respectively. These figures are according to data collected
from Alerian Capital Management and Bloomberg. As measured by the S&P 500(R)
Index, the broader equity market over the same period was 4.51%. While share
appreciation can be volatile in the short term, EIP believes that share
appreciation will approximate growth in per share quarterly dividends and cash
distributions over the long term. Over the last 10 years, growth in per share
MLP distributions and utility dividends has averaged 2.3% and 3.4%,
respectively. Over the reporting period, growth in per share cash distributions
of MLPs and utilities was -11.6% and 3.7%, respectively (source: Alerian Capital
Management and Bloomberg).
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis for the fiscal year ended October 31, 2016,
the Fund provided a total return of 12.01%, including the reinvestment of
dividends. This compares, according to collected data, to a total return of
8.71%(1) for the compounded average of the two indices (-1.80% for the MLP Index
and 18.48% for the UTY Index), and 4.51% for the S&P 500(R) Index.
The Fund declared quarterly distributions during the fiscal year as follows:
$0.2677 per share in December 2015; $0.2025 per share in March 2016; $0.2336 per
share in June 2016; and $0.2323 per share in September 2016.
-----------------------------
(1) The total return is the monthly rebalanced return for the MLP Index and
UTY Index.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
The Fund's NAV total return of 12.01% outperformed the 8.71% average return of
the MLP Index and UTY Index. Generally, the Fund's MLP positions outperformed
their corresponding index (the MLP Index) and the Fund's non-MLP positions
underperformed their corresponding index (the UTY Index). The MLP portion of the
portfolio outperformed the MLP Index in part due to overweight positions in
non-cyclical energy infrastructure MLPs. Volatile crude oil and natural gas
prices throughout the fiscal year continued to weigh on cyclical MLPs in the
index in addition to sentiment across the entire energy sector. The non-MLP
positions in the Fund underperformed the UTY Index partly due to overweight
positions in MLP parents. This negative performance was partially offset by
underweight positions in UTY Index members who underperformed the UTY index.
When comparing the Fund's performance versus the broader equity market, the Fund
benefited from positions in regulated utilities and pipeline-related MLPs that
outperformed the S&P 500(R) Index.
MARKET AND FUND OUTLOOK
From January 1, 2016 through October 31, 2016, the MLP asset class experienced
one initial public offering ("IPO") that raised $0.3 billion compared to nine
IPOs that raised $4.9 billion over the same time period in 2015. Reduced
activity can be attributed to weak MLP equity markets as many indexes were down
sharply year-over-year. From January 1, 2016 through October 31, 2016, total MLP
equity issuance was down 33% to $10.9 billion compared to $16.2 billion over the
same time period in 2015. Total MLP debt transactions were down 48% to $18.9
billion from January 1, 2016 through October 31, 2016, which compares to $36.4
billion over the same time period in 2015 (Barclays MLP Weekly).
Year-to-date, the combination of equity and debt raised approximately $29.8
billion, which represents about 8.2% of the roughly $362.4 billion of MLP market
capitalization. Since MLPs pay out virtually all their free cash flow each
quarter, this capital raising is, for the most part, a reflection of the capital
investment and acquisition activity in the asset class.
For the first three quarters of 2016, capital spending for utilities continued
to increase. Capital expenditures for the 20 companies that comprise the UTY
Index were $80 billion. Annualizing this number would result in an estimate of
about $107 billion for the year. This compares to $86 billion in 2014 and about
$100 billion in 2015. EIP believes this growth in expenditures is in response to
needs such as reliability, interconnection, modernization and growing demand.
These capital investments are supported, in part, by federal and state
regulations that allow companies to recoup investments made in their rate
structure.
The Fund continues to seek to invest in energy infrastructure securities with
mostly non-cyclical cash flows, investment-grade ratings, conservative balance
sheets, modest and/or flexible organic growth commitments and liquidity on their
revolving lines of credit. The Fund invests in securities that tend to have high
dividend payout ratios (as measured versus earnings); therefore, in EIP's
opinion, securities with unpredictable cyclical cash flows make a poor fit.
While there are some businesses within the Fund's portfolio with cyclical cash
flows, they are usually small and analyzed in the context of each company's
financial and operating leverage and payout ratio.
Page 5
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
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UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust North American Energy Infrastructure Fund (the
"Fund"), you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Fund and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
MAY 1, 2016 OCTOBER 31, 2016 PERIOD PERIOD (a)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
Actual $1,000.00 $1,102.00 0.95% $5.02
Hypothetical (5% return before expenses) $1,000.00 $1,020.36 0.95% $4.82
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (May 1,
2016 through October 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------------------------------------------------------
COMMON STOCKS -- 71.8%
ELECTRIC UTILITIES -- 20.5%
279,338 Alliant Energy Corp. $ 10,628,811
667,693 American Electric
Power Co., Inc. 43,293,214
429,370 Duke Energy Corp. 34,358,187
566,255 Emera, Inc. (CAD) 19,749,056
725,125 Eversource Energy 39,925,383
927,172 Exelon Corp. 31,588,750
413,270 Fortis, Inc. (CAD) 13,603,124
366,182 Hydro One Ltd. (CAD) (a) 6,680,440
184,633 IDACORP, Inc. 14,473,381
327,302 NextEra Energy, Inc. 41,894,656
243,167 Southern (The) Co. 12,540,122
330,488 Xcel Energy, Inc. 13,731,776
--------------
282,466,900
--------------
EQUITY REAL ESTATE INVESTMENT
TRUSTS -- 0.7%
146,626 CorEnergy Infrastructure
Trust, Inc. 3,970,632
322,159 InfraREIT, Inc. 5,354,283
--------------
9,324,915
--------------
GAS UTILITIES -- 5.0%
147,653 Atmos Energy Corp. 10,983,907
232,968 Chesapeake Utilities Corp. 14,921,600
371,764 New Jersey Resources Corp. 12,621,388
54,923 ONE Gas, Inc. 3,365,681
586,190 UGI Corp. 27,134,735
--------------
69,027,311
--------------
MULTI-UTILITIES -- 14.7%
486,701 ATCO Ltd., Class I (CAD) 17,061,568
477,938 Canadian Utilities Ltd.,
Class A (CAD) 13,657,916
507,673 CMS Energy Corp. 21,398,417
352,328 National Grid PLC, ADR 23,049,298
290,415 NiSource, Inc. 6,755,053
835,773 Public Service Enterprise
Group, Inc. 35,169,328
443,370 SCANA Corp. 32,525,623
262,082 Sempra Energy 28,068,982
421,955 WEC Energy Group, Inc. 25,199,153
--------------
202,885,338
--------------
OIL, GAS & CONSUMABLE
FUELS -- 30.6%
4,831,505 Enbridge Energy Management,
LLC (b) 117,985,352
1,752,009 Enbridge Income Fund
Holdings, Inc. (CAD) 44,463,123
463,285 Enbridge, Inc. 20,000,013
956,840 Inter Pipeline Ltd. (CAD) 19,838,754
408,551 Keyera Corp. (CAD) 12,262,927
710,524 Kinder Morgan, Inc. 14,516,005
631,535 ONEOK, Inc. 30,585,240
325,032 Spectra Energy Corp. 13,589,588
418,738 Targa Resources Corp. 18,382,598
SHARES/
UNITS DESCRIPTION VALUE
------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS
(CONTINUED)
2,013,262 TransCanada Corp. $ 91,160,503
1,378,348 Williams (The) Cos., Inc. 40,247,762
--------------
423,031,865
--------------
WATER UTILITIES -- 0.3%
51,644 American Water Works Co., Inc. 3,823,722
--------------
TOTAL COMMON STOCKS -- 71.8% 990,560,051
(Cost $896,982,640) --------------
MASTER LIMITED PARTNERSHIPS
-- 26.3%
CHEMICALS -- 0.1%
54,567 Westlake Chemical Partners, L.P. 1,151,364
--------------
GAS UTILITIES -- 2.0%
298,563 AmeriGas Partners, L.P. 14,256,383
388,850 Suburban Propane Partners, L.P. 12,517,082
--------------
26,773,465
--------------
INDEPENDENT POWER AND
RENEWABLE ELECTRICITY
PRODUCERS -- 2.6%
1,330,662 NextEra Energy Partners, L.P. (c) 36,393,605
--------------
OIL, GAS & CONSUMABLE FUELS
-- 21.6%
408,148 Alliance Holdings GP, L.P. 12,391,373
956,636 Alliance Resource Partners, L.P. 23,915,900
183,738 Buckeye Partners, L.P. 11,858,451
710,256 Columbia Pipeline Partners, L.P. 11,364,096
2,258,959 Enterprise Products Partners, L.P. 57,016,125
321,401 EQT Midstream Partners, L.P. 24,063,293
663,200 Holly Energy Partners, L.P. 20,260,760
188,624 Magellan Midstream Partners, L.P. 12,681,192
371,203 NGL Energy Partners, L.P. 6,607,413
440,494 ONEOK Partners, L.P. 17,505,232
1,053,837 Plains All American Pipeline, L.P. 31,994,491
610,836 Spectra Energy Partners, L.P. 26,046,047
315,536 Tallgrass Energy Partners, L.P. 14,271,693
413,845 TC PipeLines, L.P. 21,586,155
156,964 TransMontaigne Partners, L.P. 6,124,735
--------------
297,686,956
--------------
TOTAL MASTER LIMITED
PARTNERSHIPS -- 26.3% 362,005,390
(Cost $340,028,733) --------------
TOTAL INVESTMENTS -- 98.1% 1,352,565,441
(Cost $1,237,011,373) (d)
NET OTHER ASSETS AND
LIABILITIES -- 1.9% 26,463,417
--------------
NET ASSETS -- 100.0% $1,379,028,858
==============
See Notes to Financial Statements Page 7
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
(a) This security is restricted in the U.S. and cannot be offered for public
sale without first being registered under the Securities Act of 1933, as
amended. This security is not restricted on the foreign exchange where it
trades freely without any additional registration. As such, it does not
require the additional disclosure required of restricted securities.
(b) Non-income producing security which makes payment-in-kind ("PIK")
distributions. For the year ended October 31, 2016, the Fund received
390,334 PIK shares of Enbridge Energy Management, LLC.
(c) NextEra Energy Partners, L.P. is taxed as a "C" corporation for federal
income tax purposes.
(d) Aggregate cost for federal income tax purposes is $1,257,466,804. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$125,002,774 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$29,904,137.
ADR American Depositary Receipt
CAD Canadian Dollar - Security is denominated in Canadian Dollars and is
translated into U.S. Dollars based upon the current exchange rate.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
Level 1 - Quoted Prices
Level 2 - Other Significant Observable Inputs
Level 3 - Significant Unobservable Inputs
LEVEL 1 LEVEL 2 LEVEL 3
------------------------------------------
Common Stocks* $ 990,560,051 $ -- $ --
Master Limited
Partnerships* 362,005,390 -- --
------------------------------------------
Total Investments $1,352,565,441 $ -- $ --
==========================================
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2016.
Page 8 See Notes to Financial Statements
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value.................................................. $ 1,352,565,441
Cash................................................................... 22,543,652
Receivables:
Capital shares sold................................................. 4,951,037
Dividends........................................................... 4,927,194
----------------
Total Assets..................................................... 1,384,987,324
----------------
LIABILITIES:
Due to custodian foreign currency...................................... 307
Payables:
Investment securities purchased..................................... 4,856,963
Investment advisory fees............................................ 1,101,196
----------------
Total Liabilities................................................ 5,958,466
----------------
NET ASSETS............................................................. $ 1,379,028,858
================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 1,369,580,531
Par value.............................................................. 557,050
Accumulated net investment income (loss)............................... (6,015,082)
Accumulated net realized gain (loss) on investments and foreign
currency transactions............................................... (100,644,813)
Net unrealized appreciation (depreciation) on investments and
foreign currency translation........................................ 115,551,172
----------------
NET ASSETS............................................................. $ 1,379,028,858
================
NET ASSET VALUE, per share............................................. $ 24.76
================
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 55,705,000
================
Investments, at cost................................................... $ 1,237,011,373
================
Foreign currency, at cost (proceeds)................................... $ (312)
================
See Notes to Financial Statements Page 9
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Dividends.............................................................. $ 27,795,623
Foreign tax withholding................................................ (1,333,005)
----------------
Total investment income............................................. 26,462,618
----------------
EXPENSES:
Investment advisory fees............................................... 10,507,888
----------------
Total expenses...................................................... 10,507,888
----------------
NET INVESTMENT INCOME (LOSS)........................................... 15,954,730
----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... (85,880,092)
In-kind redemptions................................................. 6,634,547
Foreign currency transactions....................................... 123,374
----------------
Net realized gain (loss)............................................... (79,122,171)
----------------
Net change in unrealized appreciation (depreciation) on:
Investments......................................................... 206,872,114
Foreign currency translation........................................ (3,328)
----------------
Net change in unrealized appreciation (depreciation)................... 206,868,786
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 127,746,615
----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 143,701,345
================
Page 10 See Notes to Financial Statements
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
10/31/2016 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................ $ 15,954,730 $ 15,528,848
Net realized gain (loss)............................................ (79,122,171) 22,512,851
Net change in unrealized appreciation (depreciation)................ 206,868,786 (204,121,247)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..... 143,701,345 (166,079,548)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (14,680,942) (36,418,951)
Return of capital................................................... (31,088,228) --
-------------- --------------
Total distributions to shareholders................................. (45,769,170) (36,418,951)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold........................................... 388,009,619 543,756,857
Cost of shares redeemed............................................. (59,521,848) (335,596,477)
-------------- --------------
Net increase (decrease) in net assets resulting
from shareholder transactions.................................... 328,487,771 208,160,380
-------------- --------------
Total increase (decrease) in net assets............................. 426,419,946 5,661,881
NET ASSETS:
Beginning of period................................................. 952,608,912 946,947,031
-------------- --------------
End of period....................................................... $1,379,028,858 $ 952,608,912
============== ==============
Accumulated net investment income (loss) at end of period........... $ (6,015,082) $ 3,616,845
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period............................. 41,355,000 34,155,000
Shares sold......................................................... 17,300,000 20,200,000
Shares redeemed..................................................... (2,950,000) (13,000,000)
-------------- --------------
Shares outstanding, end of period................................... 55,705,000 41,355,000
============== ==============
See Notes to Financial Statements Page 11
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 6/20/2012 (a)
---------------------------------------------------------- THROUGH
2016 2015 2014 2013 10/31/2012
------------ ------------ ------------ ------------ --------------
Net asset value, beginning of period $ 23.03 $ 27.72 $ 23.40 $ 21.26 $ 19.99
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.30 0.39 0.45 0.39 0.05
Net realized and unrealized gain (loss) 2.37 (4.18) 4.71 2.46 1.33
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.67 (3.79) 5.16 2.85 1.38
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.30) (0.90) (0.84) (0.71) (0.05)
Return of capital (0.64) -- -- -- (0.06)
---------- ---------- ---------- ---------- ----------
Total distributions (0.94) (0.90) (0.84) (0.71) (0.11)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 24.76 $ 23.03 $ 27.72 $ 23.40 $ 21.26
========== ========== ========== ========== ==========
TOTAL RETURN (b) 12.01% (13.92)% 22.44% 13.54% 6.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,379,029 $ 952,609 $ 946,947 $ 433,099 $ 101,109
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.95% 0.95% 0.95% 0.95% 0.95% (c)
Ratio of net investment income (loss) to
average net assets 1.44% 1.47% 1.11% 1.28% 0.89% (c)
Portfolio turnover rate (d) 40% 34% 7% 22% 3%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
First Trust Portfolios L.P. seeded the First Trust North American Energy
Infrastructure Fund on June 1, 2012 in order to provide initial capital
required by SEC rules.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 12 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust North American Energy Infrastructure Fund (the
"Fund"), which trades under the ticker "EMLP" on the NYSE Arca, Inc. ("NYSE
Arca"). Unlike conventional mutual funds, the Fund issues and redeems shares on
a continuous basis, at net asset value ("NAV"), only in large specified blocks
consisting of 50,000 shares called a "Creation Unit." Creation Units are issued
and redeemed principally in-kind for securities in which the Fund invests or for
cash or, in certain circumstances, a combination of both. Except when aggregated
in Creation Units, the Fund's shares are not redeemable securities.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek total return. The Fund invests in energy infrastructure
companies which principally include publicly-traded master limited partnerships
and limited liability companies taxed as partnerships ("MLPs"), MLP affiliates,
Canadian Income Equities, pipeline companies, utilities, and other companies
that derive at least 50% of their revenues from operating or providing services
in support of infrastructure assets such as pipelines, power transmission and
petroleum and natural gas storage in the petroleum, natural gas and power
generation industries (collectively, "Energy Infrastructure Companies").
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Foreign securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
The Fund's NAV is calculated by dividing the value of all assets of the Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
the market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Common stocks, MLPs and other equity securities listed on any national or
foreign exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the
London Stock Exchange Alternative Investment Market ("AIM")) are valued at
the last sale price on the exchange on which they are principally traded
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 -Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital and investment income. The Fund records estimated
return of capital and investment income based on historical information
available from each MLP. These estimates may subsequently be revised based on
information received from the MLPs after their tax reporting periods are
concluded. For the fiscal year ended October 31, 2016, distributions of
$21,288,150 received from MLPs have been reclassified as return of capital.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of the Fund, if any, are declared and paid
quarterly, or as the Board of Trustees may determine from time to time.
Distributions of net realized gains earned by the Fund, if any, are distributed
at least annually.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on significantly modified portfolio securities held by the Fund
and have no impact on net assets or NAV per share. Temporary differences, which
arise from recognizing certain items of income, expense and gain/loss in
different periods for financial statement and tax purposes, will reverse at some
time in the future.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income............................... $ 14,680,942 $ 36,418,951
Capital gain.................................. -- --
Return of capital............................. 31,088,228 --
As of October 31, 2016, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................. $ --
Accumulated capital and other gain (loss)..... (86,204,464)
Net unrealized appreciation (depreciation).... 95,095,741
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had non-expiring capital loss carryforwards available for federal income
tax purposes of $86,204,464.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2013,
2014, 2015 and 2016 remain open to federal and state audit. As of October 31,
2016, management has evaluated the application of these standards to the Fund
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statement of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of income and gains on various investment securities held by the Fund and
in-kind transactions. The results of operations and net assets were not affected
by these adjustments. For the fiscal year ended October 31, 2016, the
adjustments for the Fund were as follows:
ACCUMULATED
ACCUMULATED NET REALIZED
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
-------------- -------------- --------------
$ (10,905,715) $ 6,233,515 $ 4,672,200
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, from reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the securities in the Fund's
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. The Fund and
First Trust have retained Energy Income Partners, LLC ("EIP" or the
"Sub-Advisor"), an affiliate of First Trust, to serve as its investment
sub-advisor. In this capacity, EIP is responsible for the selection and on-going
monitoring of the securities in the Fund's investment portfolio. Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust
will supervise EIP and its management of the investment of the Fund's assets and
will pay EIP for its services as the Fund's sub-advisor. First Trust will also
be responsible for the Fund's expenses, including the cost of transfer agency,
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a 12b-1 plan, if any,
and extraordinary expenses. The Fund has agreed to pay First Trust an annual
unitary management fee equal to 0.95% of its average daily net assets. EIP
receives a sub-advisory fee from First Trust equal to 45% of any remaining
monthly investment management fee paid to First Trust after the average Fund
expenses accrued during the most recent twelve months are subtracted from the
investment management fee in a given month.
First Trust Capital Partners, LLC ("FTCP"), an affiliate of First Trust, owns,
through a wholly-owned subsidiary, a 15% ownership interest in each of EIP and
EIP Partners, LLC, an affiliate of EIP.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended October 31, 2016, the cost of purchases and proceeds
from sales of investments, excluding short-term investments and in-kind
transactions, were $437,536,093 and $432,471,598, respectively.
For the fiscal year ended October 31, 2016, the cost of in-kind purchases and
proceeds from in-kind sales were $370,454,995 and $58,412,405, respectively.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make or receive a cash payment referred to as the "Cash Component," which is an
amount equal to the difference between the NAV of the Fund Shares (per Creation
Unit Aggregation) and the market value of the Deposit Securities, and/or (ii)
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 Authorized Participant 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 Authorized
Participant will receive the Cash Component. Authorized Participants purchasing
Creation Units must pay to BNYM, as transfer agent, a creation transaction fee
(the "Creation Transaction Fee") regardless of the number of Creation Units
purchased in the transaction. The Creation Transaction Fee is based on the
composition of the securities included in the Fund's portfolio and the countries
in which the transactions are settled. The Creation Transaction Fee is currently
$500. 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 the 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.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016
Authorized Participants redeeming Creation Units must pay to BNYM, as transfer
agent, a standard redemption transaction fee (the "Redemption Transaction Fee"),
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 the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 31, 2018.
7. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST NORTH AMERICAN ENERGY
INFRASTRUCTURE FUND
We have audited the accompanying statement of assets and liabilities of First
Trust North American Energy Infrastructure Fund (the "Fund"), a series of the
First Trust Exchange-Traded Fund IV, including the portfolio of investments, as
of October 31, 2016, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2016, by correspondence with the Fund's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust North American Energy Infrastructure Fund as of October 31, 2016, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 15, 2016
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ADDITIONAL INFORMATION
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
FEDERAL TAX INFORMATION
For the taxable year ended October 31, 2016, the following percentages of income
dividend paid by the Fund qualified for the dividends received deduction
available to corporations and is hereby designated as qualified dividend income:
Dividends Received Deduction Qualified Dividend Income
---------------------------- -------------------------
100.00% 100.00%
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND IV.
The following summarizes some of the risks that should be considered for the
Fund.
CONCENTRATION RISK. A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the equity shares into depositary receipts and vice versa. Such restrictions may
cause the equity shares of the underlying issuer to trade at a discount or
premium to the market price of the depositary receipts.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as market volatility, or
when political or economic events affecting the issuers occur. In addition,
common stock prices may be particularly sensitive to rising interest rates, as
the cost of the capital rises and borrowing costs increase.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than larger, more established companies as a
result of several factors, including limited trading volumes, products or
financial resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies.
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund, Shares of the Fund or securities in general may fall in value. Shares are
subject to market fluctuations caused by such factors as economic, political,
regulatory or market developments, changes in interest rates and perceived
trends in securities prices. Overall securities values could decline generally
or could underperform other investments.
NON-DIVERSIFICATION RISK. Because the Fund is non-diversified, it may invest a
relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issues.
ENERGY INFRASTRUCTURE COMPANIES RISK. The Fund invests in Energy Infrastructure
Companies and is subject to certain risks inherent in investing in these types
of securities. Energy Infrastructure Companies may be directly affected by
energy commodity prices, especially those Energy Infrastructure Companies which
own the underlying energy commodity. A decrease in the production or
availability of natural gas, natural gas liquids ("NGLs"), crude oil, coal or
other energy commodities or a decrease in the volume of such commodities
available for transportation, processing, storage or distribution may adversely
impact the financial performance of Energy Infrastructure Companies. Energy
Infrastructure Companies are subject to significant federal, state and local
government regulation in virtually every aspect of their operations, including
how facilities are constructed, maintained and operated, environmental and
safety controls, and the prices they may charge for products and services.
Various governmental authorities have the power to enforce compliance with these
regulations and the permits issued under them and violators are subject to
administrative, civil and criminal penalties, including civil fines, injunctions
or both. Stricter laws, regulations or enforcement policies could be enacted in
the future which would likely increase compliance costs and may adversely affect
the financial performance of Energy Infrastructure Companies. Natural disasters,
such as hurricanes in the Gulf of Mexico, also may impact Energy Infrastructure
Companies.
Certain Energy Infrastructure Companies are subject to the imposition of rate
caps, increased competition due to deregulation, the difficulty in obtaining an
adequate return on invested capital or in financing large construction projects,
the limitations on operations and increased costs and delays attributable to
environmental considerations, and the capital market's ability to absorb utility
debt. In addition, taxes, government regulation, international politics, price
and supply fluctuations, volatile interest rates and energy conservation may
cause difficulties for these companies. Such issuers have been experiencing
certain of these problems to varying degrees.
MLP RISK. An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments. In addition, there
is the risk that a MLP could be, contrary to its intention, taxed as a
corporation, resulting in decreased returns from such MLP.
GEOGRAPHIC RISK. The Fund invests primarily in securities of companies
headquartered or incorporated in the United States and Canada. An investment in
a particular geographic region may be particularly susceptible to changes in the
political, diplomatic and economic conditions of that region or any new
regulatory requirements of the region. Accordingly, an investment in the Fund
may be more volatile than an investment diversified across several geographic
regions.
NON-U.S. SECURITIES RISK. The Fund invests in securities of non-U.S. issuers,
including non-U.S. dollar-denominated securities traded in Canada or other
foreign countries and U.S. dollar-denominated securities of non-U.S. issuers
traded in the United States. Such securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; excessive taxation; government seizure of assets;
different legal or accounting standards; and less government supervision and
regulation of exchanges in foreign countries. These risks may be heightened for
securities of companies located in, or with significant operations in, emerging
market countries.
CURRENCY RISK. Because the Fund's NAV is determined on the basis of U.S. dollars
and the Fund invests in foreign securities, you may lose money if the local
currency of a foreign market depreciates against the U.S. dollar, even if the
local currency value of the Fund's holdings goes up.
INTEREST RATE RISK. Rising interest rates could adversely impact the financial
performance of MLPs, MLP-related entities and energy companies. Rising interest
rates may increase an MLP's, MLP-related entity's or energy company's cost of
capital, which would increase operating costs and may reduce an MLP's,
MLP-related entity's or energy company's ability to execute acquisitions or
expansion projects in a cost-effective manner. Rising interest rates may also
impact the price of MLP units, MLP-related entity securities and energy company
shares as the yields on alternative investments increase.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, Energy
Income Partners will apply investment techniques and risk analyses that may not
have the desired result. There can be no guarantee that the Fund will meet its
investment objective.
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund IV
(the "Trust"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Advisory Agreement")
with First Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the
First Trust North American Energy Infrastructure Fund (the "Fund") and the
Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Trust on behalf of the
Fund, the Advisor and Energy Income Partners, LLC (the "Sub-Advisor"). The Board
approved the continuation of the Agreements for a one-year period ending June
30, 2017 at a meeting held on June 13, 2016. The Board determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the unitary fee
rate payable by the Fund as compared to fees charged to a peer group of funds
(most of which were exchange-traded funds ("ETFs")) compiled by Management
Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"), and as
compared to fees charged to other clients of the Advisor, including other ETFs
managed by the Advisor; the sub-advisory fee as compared to fees charged to
other clients of the Sub-Advisor; expenses of the Fund as compared to expense
ratios of the funds in the MPI Peer Group; performance information for the Fund;
the nature of expenses incurred in providing services to the Fund and the
potential for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall-out benefits to the Advisor and its affiliates, First
Trust Portfolios L.P. ("FTP") and First Trust Capital Partners, LLC ("FTCP"),
and the Sub-Advisor; and information on the Advisor's and the Sub-Advisor's
compliance programs. The Board reviewed initial materials with the Advisor at a
special meeting held on April 22, 2016, prior to which the Independent Trustees
and their counsel met separately to discuss the information provided by the
Advisor and the Sub-Advisor. Following the April meeting, independent legal
counsel on behalf of the Independent Trustees requested certain clarifications
and supplements to the materials provided, and the information provided in
response to those requests was considered at an executive session of the
Independent Trustees and independent legal counsel held prior to the June 13,
2016 meeting, as well as at the meeting held that day. The Board applied its
business judgment to determine whether the arrangements between the Trust and
the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be
reasonable business arrangements from the Fund's perspective as well as from the
perspective of the Fund's shareholders. The Board determined that, given the
totality of the information provided with respect to the Agreements, the Board
had received sufficient information to renew the Agreements. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the
Fund's unitary fee.
In reviewing the Agreements, the Board considered the nature, extent and quality
of the services provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Trust and the Fund and reviewed all of the services provided by the Advisor to
the Fund, including the oversight of the Sub-Advisor, as well as the background
and experience of the persons responsible for such services. In reviewing the
services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with the
1940 Act, as well as the Fund's compliance with its investment objective and
policies. In addition, as part of the Board's consideration of the Advisor's
services, the Advisor, in its written materials and at the April 22, 2016
meeting, described to the Board the scope of its ongoing investment in
additional infrastructure and personnel to maintain and improve the quality of
services provided to the Fund and the other funds in the First Trust Fund
Complex. With respect to the Sub-Advisory Agreement, the Board noted that the
Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund's
investments. The Board reviewed the materials provided by the Sub-Advisor and
considered the services that the Sub-Advisor provides to the Fund, including the
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
Sub-Advisor's day-to-day management of the Fund's investments. In considering
the Sub-Advisor's management of the Fund, the Board noted the background and
experience of the Sub-Advisor's portfolio management team. In light of the
information presented and the considerations made, the Board concluded that the
nature, extent and quality of the services provided to the Trust and the Fund by
the Advisor and the Sub-Advisor under the Agreements have been and are expected
to remain satisfactory and that the Sub-Advisor, under the oversight of the
Advisor, has managed the Fund consistent with the Fund's investment objective
and policies.
The Board considered the unitary fee rate payable by the Fund under the Advisory
Agreement for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from the unitary fee. The Board considered that as part
of the unitary fee the Advisor is responsible for the Fund's expenses, including
the cost of sub-advisory, transfer agency, custody, fund administration, legal,
audit and other services and license fees (if any), but excluding interest,
taxes, brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and service fees pursuant to a Rule 12b-1
plan, if any, and extraordinary expenses. The Board received and reviewed
information showing the advisory or unitary fee rates and expense ratios of the
peer funds in the MPI Peer Group, as well as advisory fee rates charged by the
Advisor and Sub-Advisor to other fund (including ETFs) and non-fund clients, as
applicable. Because the Fund's MPI Peer Group included peer funds that pay a
unitary fee and because the Fund pays a unitary fee, the Board determined that
expense ratios were the most relevant comparative data point. Based on the
information provided, the Board noted that the unitary fee for the Fund was
above the median total (net) expense ratio of the peer funds in the MPI Peer
Group. With respect to the MPI Peer Group, the Board discussed with
representatives of the Advisor limitations in creating peer groups for
actively-managed ETFs and different business models that may affect the pricing
of services among ETF sponsors. The Board took these limitations and differences
into account in considering the peer data. With respect to fees charged to other
clients, the Board considered differences between the Fund and other clients
that limited their comparability. In considering the unitary fee rate overall,
the Board also considered the Advisor's statement that it seeks to meet investor
needs through innovative and value-added investment solutions and the Advisor's
description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process that it has established for monitoring the Fund's performance and
portfolio risk on an ongoing basis, which includes quarterly performance
reporting from the Advisor and Sub-Advisor for the Fund. The Board determined
that this process continues to be effective for reviewing the Fund's
performance. The Board received and reviewed information comparing the Fund's
performance for periods ended December 31, 2015 to the performance of the MPI
Peer Group and a blended benchmark index. Based on the information provided, the
Board noted that the Fund outperformed the MPI Peer Group average for the one-
and three-year periods ended December 31, 2015. The Board also noted that the
Fund underperformed the blended benchmark index for the one- and three-year
periods ended December 31, 2015.
On the basis of all the information provided on the unitary fee and performance
of the Fund and the ongoing oversight by the Board, the Board concluded that the
unitary fee for the Fund (out of which the Sub-Advisor is compensated) continues
to be reasonable and appropriate in light of the nature, extent and quality of
the services provided by the Advisor and the Sub-Advisor to the Fund under the
Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board noted that any reduction
in fixed costs associated with the management of the Fund would benefit the
Advisor, but that the unitary fee structure provides a level of certainty in
expenses for the Fund. The Board considered the revenues and allocated costs
(including the allocation methodology) of the Advisor in serving as investment
advisor to the Fund for the twelve months ended December 31, 2015 and the
estimated profitability level for the Fund calculated by the Advisor based on
such data, as well as complex-wide and product-line profitability data for the
same period. The Board noted the inherent limitations in the profitability
analysis, and concluded that, based on the information provided, the Advisor's
profitability level for the Fund was not unreasonable. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund. The Board noted that FTCP, has an ownership
interest in the Sub-Advisor and considered potential fall-out benefits to the
Advisor from such ownership interest. The Board also considered that the Advisor
had identified as a fall-out benefit to the Advisor and FTP their exposure to
investors and brokers who, absent their exposure to the Fund, may have had no
dealings with the Advisor or FTP.
The Board considered that the Sub-Advisor's investment services expenses are
primarily fixed, and that the Sub-Advisor has made recent investments in
infrastructure and personnel. The Board considered that the sub-advisory fee
rate was negotiated at arm's length between the Advisor and the Sub-Advisor. The
Board also considered information provided by the Sub-Advisor as to the
profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted
the inherent limitations in the profitability analysis and concluded that the
profitability analysis for the Advisor was more relevant. The Board considered
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
fall-out benefits that may be realized by the Sub-Advisor from its relationship
with the Fund, including soft-dollar arrangements, and considered a summary of
such arrangements. The Board also considered the potential fall-out benefits to
the Sub-Advisor from FTCP's ownership interest in the Sub-Advisor.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Trust and the Fund. No single
factor was determinative in the Board's analysis.
REMUNERATION
First Trust Advisors L.P. ("First Trust") is authorised and regulated by the
U.S. Securities and Exchange Commission and is entitled to market shares of the
First Trust North American Energy Infrastructure Fund it manages (the "Fund") in
the United Kingdom in accordance with the cooperation arrangements in Article 42
of the Alternative Investment Fund Managers Directive (the "Directive"). First
Trust is required under the Directive to make disclosures in respect of
remuneration. The following disclosures are made in line with First Trust's
interpretation of currently available regulatory guidance on remuneration
disclosures.
During the year ended December 31, 2015, the amount of remuneration paid (or to
be paid) by First Trust Advisors L.P. in respect of the Fund is $557,561. This
figure is comprised of $27,906 paid (or to be paid) in fixed compensation and
$529,655 paid (or to be paid) in variable compensation. There were a total of 13
beneficiaries of the remuneration described above. Those amounts include
$308,143 paid (or to be paid) to senior management of First Trust Advisors L.P.
and $249,418 paid (or to be paid) to other employees whose professional
activities have a material impact on the risk profiles of First Trust Advisors
L.P. or the Fund (collectively, "Code Staff").
Code Staff included in the aggregated figures disclosed above are rewarded in
line with First Trust's remuneration policy (the "Remuneration Policy") which is
determined and implemented by First Trust's senior management. The Remuneration
Policy reflects First Trust's ethos of good governance and encapsulates the
following principal objectives:
i. to provide a clear link between remuneration and performance of
First Trust and to avoid rewarding for failure;
ii. to promote sound and effective risk management consistent with the
risk profiles of the Funds managed by First Trust; and
iii. to remunerate staff in line with the business strategy, objectives,
values and interests of First Trust and the Funds managed by First
Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when
considering and implementing remuneration for Code Staff and considers whether
any potential award to such person(s) would give rise to a conflict of interest.
First Trust does not reward failure, or consider the taking of risk or failure
to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in
respect of performance-related remuneration of Code Staff by reference to a
broad range of measures including (i) individual performance (using financial
and non-financial criteria), and (ii) the overall performance of First Trust.
Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the
senior management sets fixed salaries at a level sufficient to ensure that
variable remuneration incentivises and rewards strong individual performance but
does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Page 24
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 136 None
c/o First Trust Advisors L.P. Limited Partner Gundersen Real Estate
120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed
Suite 400 LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 136 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Inception Inc., ADM
Suite 400 Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 136 Director of Trust
c/o First Trust Advisors L.P. (Financial and Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 136 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Covenant
120 E. Liberty Drive, o Since Inception Pelita Harapan Educational Foundation Transport Inc.
Suite 400 (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products
and Services); President and Chief
Executive Officer (June 2012 to
September 2014), Dew Learning LLC
(Educational Products and Services);
President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 136 None
Chairman of the Board Advisors L.P. and First Trust
120 E. Liberty Drive, o Since Inception Portfolios L.P.; Chairman of the
Suite 400 Board of Directors, BondWave LLC
Wheaton, IL 60187 (Software Development Company)
D.O.B.: 09/55 and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust
D.O.B.: 01/66 Advisors L.P. and First Trust Portfolios L.P.;
Chief Financial Officer, BondWave LLC
(Software Development Company) (January 2016
to Present) and Stonebridge Advisors LLC
(Investment Advisor) (January 2016 to Present)
Donald P. Swade Treasurer,Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present),
120 E. Liberty Drive, Officer and Chief Vice President (April 2012 to July 2016),
Suite 400 Accounting Officer o Since January 2016 First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P., Vice President (September
D.O.B.: 08/72 2006 to April 2012), Guggenheim Funds
Investment Advisors, LLC/ Claymore Securities,
Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and
Suite 400 General Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 o Since Inception Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Inception 2012), First Trust Advisors L.P. and First
Wheaton, IL 60187 Trust Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance o Indefinite Term Deputy General Counsel, First Trust Advisors
120 E. Liberty Drive, Officer and L.P. and First Trust Portfolios L.P.
Suite 400 Assistant Secretary o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors
120 E. Liberty Drive, L.P. and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to
120 E. Liberty Drive, Present), Vice President (August 2005 to
Suite 400 o Since Inception September 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 11/70
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 26
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining that relationship. We are committed to protecting the
security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 27
This page intentionally left blank.
FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
10 Wright Street
Westport, CT 06880
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
Legal Counsel
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Senior Loan Fund (FTSL)
Annual Report
For the Year Ended
October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 5
Understanding Your Fund Expenses............................................. 8
Portfolio of Investments..................................................... 9
Statement of Assets and Liabilities.......................................... 21
Statement of Operations...................................................... 22
Statements of Changes in Net Assets.......................................... 23
Financial Highlights......................................................... 24
Notes to Financial Statements................................................ 25
Report of Independent Registered Public Accounting Firm...................... 31
Additional Information....................................................... 32
Board of Trustees and Officers............................................... 37
Privacy Policy............................................................... 39
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Senior Loan Fund; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com
HOW TO READ THIS REPORT This report contains information that may help you
evaluate your investment in the Fund. It includes details about the Fund's
portfolio and presents data and analysis that provide insight into the Fund's
performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Senior Loan Fund.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close
June 30, 2016 at a combined market capitalization of $62 trillion. As of October
31, 2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
The First Trust Senior Loan Fund's (the "Fund") primary investment objective is
to provide high current income. The Fund's secondary investment objective is the
preservation of capital. The Fund seeks to outperform each of the S&P/LSTA
Leveraged Loan 100 Index and the Markit iBoxx USD Liquid Leveraged Loan Index by
investing at least 80% of its net assets (including investment borrowings) in,
under normal market conditions, a diversified portfolio of first lien senior
floating rate loan interests ("Senior Loans"). A Senior Loan is an advance or
commitment of funds made by one or more banks or similar financial institutions
to one or more corporations, partnerships or other business entities and
typically pays interest at a floating or adjusting rate that is determined
periodically at a designated premium above a base lending rate, most commonly
the London Interbank Offered Rate ("LIBOR"). A Senior Loan is considered senior
to all other unsecured claims against the borrower, senior to or equal with all
other secured claims; this means that in the event of a bankruptcy, the Senior
Loan, together with other first lien claims, is entitled to be the first to be
repaid out of proceeds of the assets securing the loans, before other existing
unsecured claims or interests receive repayment. However, in bankruptcy
proceedings, there may be other claims, such as taxes or additional advances
that take precedence.
The Fund invests primarily in Senior Loans that are below investment grade
quality at the time of investment. Securities rated below investment grade,
commonly referred to as "junk" or "high-yield" securities, include securities
that are rated Ba1/BB+/BB+ or below by Moody's Investors Service, Inc., Fitch,
Inc., or Standard & Poor's Ratings Group, respectively. The Fund invests in
Senior Loans made predominantly to businesses operating in North America, but
may also invest in Senior Loans made to businesses operating outside of North
America. The Senior Loans included in the Fund's portfolio often maintain an
average interest rate duration of less than 90 days; however, the inclusion of
LIBOR floors on certain Senior Loans or other factors may cause interest rate
duration to be longer than 90 days. The Fund may also invest up to 20% of its
net assets in (1) non-Senior Loan debt securities, which may be fixed-rate or
floating-rate income-producing securities (including, without limitation, U.S.
government debt securities and corporate debt securities), (2) warrants and
equity securities issued by a borrower or its affiliates, and/or (3) securities
of other investment companies.
------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (5/1/13) Inception (5/1/13)
10/31/16 to 10/31/16 to 10/31/16
FUND PERFORMANCE
NAV 4.43% 2.85% 10.35%
Market Price 4.21% 2.88% 10.44%
INDEX PERFORMANCE
Markit iBoxx USD Liquid Leveraged Loan Index 5.31% 2.29% 8.26%
S&P/LSTA Leveraged Loan 100 Index 6.81% 2.67% 9.68%
------------------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
-------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
INDUSTRY CLASSIFICATION SECURITIES
-------------------------------------------------------
Health Care Providers & Services 14.3%
Hotels, Restaurants & Leisure 13.4
Pharmaceuticals 7.8
Media 6.4
Software 5.0
Food & Staples Retailing 4.4
Life Sciences Tools & Services 4.0
Containers & Packaging 3.8
Food Products 3.8
Specialty Retail 3.4
Diversified Financial Services 3.2
Professional Services 3.1
Diversified Telecommunication Services 3.0
Electric Utilities 2.8
Semiconductors & Semiconductor
Equipment 2.7
Technology Hardware, Storage, &
Peripherals 2.5
Health Care Equipment & Supplies 2.2
Real Estate Management & Development 2.2
Diversified Consumer Services 1.9
Insurance 1.9
Aerospace & Defense 1.4
Beverages 1.0
Commercial Services & Supplies 1.0
Building Products 1.0
Industrial Conglomerates 0.6
Distributors 0.5
Chemicals 0.5
Health Care Technology 0.4
Metals & Mining 0.4
Capital Markets 0.3
Auto Components 0.3
Consumer Finance 0.2
Wireless Telecommunication Services 0.2
Oil, Gas & Consumable Fuels 0.1
Coal & Consumable Fuels 0.1
Household Products 0.1
Construction Materials 0.1
Trading Companies & Distributors 0.0*
Independent Power and Renewable
Electricity Producers 0.0*
--------
Total 100.0%
========
* Amount represents less than 0.1%.
-------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
ASSET CLASSIFICATION SECURITIES
-------------------------------------------------------
Senior Floating-Rate Loan Interests 93.4%
Corporate Bonds 5.2
Foreign Corporate Bonds 1.3
Common Stocks 0.1
Rights 0.0*
--------
Total 100.0%
========
-------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
CREDIT QUALITY (S&P RATINGS)(1) DEBT SECURITIES
-------------------------------------------------------
BBB 3.1%
BBB- 4.0
BB+ 5.3
BB 11.8
BB- 17.3
B+ 23.6
B 21.1
B- 8.1
CCC+ 4.4
CCC 0.7
CCC- 0.0*
CC 0.1
Not Rated 0.5
--------
Total 100.0%
========
-------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
TOP 10 ISSUERS SECURITIES
-------------------------------------------------------
Valeant Pharmaceuticals International,
Inc. 2.7%
Univision Communications, Inc. 2.4
TEX Operations Co. LLC 2.4
Reynolds Group Holdings, Inc. 2.4
New HB Acquisition LLC 2.3
BJ's Wholesale Club, Inc. 2.2
Dell, Inc. 2.1
Albertsons LLC 2.0
DTZ Worldwide LTD. 2.0
PetSmart, Inc. 2.0
--------
Total 22.5%
========
(1) The ratings are by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO) of the
creditworthiness of an issuer with respect to debt obligations except for
those debt obligations that are privately rated. Ratings are measured on a
scale that generally ranges from AAA (highest) to D (lowest). Investment
grade is defined as those issuers that have a long-term credit rating of
BBB- or higher. The credit ratings shown relate to the credit worthiness
of the issuers of the underlying securities in the Fund, and not to the
Fund or its shares. Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
MAY 1, 2013 - OCTOBER 31, 2016
First Trust Senior Markit iBoxx USD Liquid S&P/LSTA Leveraged
Loan Fund Leveraged Loan Index Loan 100 Index
5/1/13 $10,000 $10,000 $10,000
10/31/13 10,092 10,103 10,122
4/30/14 10,275 10,323 10,338
10/31/14 10,385 10,389 10,434
4/30/15 10,637 10,594 10,589
10/31/15 10,567 10,280 10,268
4/30/16 10,763 10,484 10,527
10/31/16 11,034 10,826 10,968
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period May 2, 2013 (commencement of
trading) through October 31, 2016. 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. Data presented represents
past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
------------------------------------- -------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
5/2/13 - 10/31/13 97 20 4 0 7 0 0 0
11/1/13 - 10/31/14 197 0 0 0 54 1 0 0
11/1/14 - 10/31/15 180 20 1 0 50 0 0 0
11/1/15 - 10/31/16 185 2 0 0 65 0 0 0
Page 4
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PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
INVESTMENT MANAGER
The First Trust Advisors L.P. ("First Trust" or the "Advisor") Leveraged Finance
Team is comprised of 14 experienced investment professionals specializing in
below investment grade securities. The team is comprised of portfolio
management, research, trading and operations. As of October 31, 2016, the First
Trust Leveraged Finance Team managed or supervised approximately $2.55 billion
in senior secured bank loans and high-yield bonds. These assets are managed
across various strategies, including a closed-end fund, an open-end fund, four
exchange-traded funds, one UCITs fund and a series of unit investment trusts on
behalf of retail and institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
COMMENTARY
The First Trust Senior Loan Fund is an actively managed exchanged-traded fund.
The primary investment objective is to provide current income. The Fund's
secondary investment objective is the preservation of capital.
MARKET RECAP
The last 12 months were exceptionally strong for the high-yield bond and senior
loan market with trailing 12-month returns of 10.18% and 6.81% for the BofA
Merrill Lynch US High Yield Constrained Index and the S&P/LSTA Leveraged Loan
100 Index, respectively. In fact, high-yield bonds and senior loans outperformed
nearly every other major asset class over the prior year period. For context,
the total return of the S&P 500(R) Index over the period was only 4.51%. The
high-yield bond market is on pace to post its highest calendar year return since
emerging from the global financial crisis in 2009, in our view. We believe the
strong returns in the high-yield bond and senior loan markets are due to a
number of contributing factors. Accommodative central banks around the globe and
a rebound in commodity prices have been a catalyst for risk assets. In addition,
U.S. yields remain attractive relative to foreign yields, although yields in the
U.S. remain low by historical standards. As a result, the hunt for yield
continues to attract foreign investors to the U.S. Consider the fact that at the
end of October, the German Bund 10-year bond yield was 0.16% and the Japanese
10-year Government bond yield was -0.05%. When compared to the 10-year U.S.
Treasury bond yield of 1.83%, we believe one can quickly discern why the foreign
investment into U.S. Treasury assets is continuing unabated.
High-Yield Bond Market
The BofA Merrill Lynch US High Yield Constrained Index returned 10.18% for the
12-month period. Additionally, the high-yield bond market ended the period with
nine consecutive months of positive returns.
Lower quality high-yield bonds outperformed higher quality high-yield bonds in
the period. Lower quality CCC rated issues returned 16.57%, significantly
outperforming the returns of higher quality B rated issues return of 6.98% and
BB rated issues return of 6.73% in the period. The average price of high-yield
bonds in the market entered the period at $94.19, fell to an average price of
$86.64 at the end of February in the wake of eroding commodity prices, and
recovered to end the period with an average price of $99.10 as commodity prices
rebounded.
Senior Loan Market
The S&P/LSTA Leveraged Loan 100 Index returned 6.81% for the 12-month period.
The Index provider does not report certain data for the S&P/LSTA Leveraged Loan
100 Index, however, data is provided for the broader S&P/LSTA Leveraged Loan
Index from which the S&P/LSTA Leveraged Loan 100 Index is derived. Similar to
the high-yield bond market, the senior loan market ended the period with eight
consecutive months of positive returns.
Lower quality senior loans outperformed higher quality senior loans in the
period. Lower quality CCC rated issues returned 14.48%, significantly
outperforming the returns of lower quality B rated issues return of 6.77% and BB
rated issues return of 5.16%. The average price of senior loans in the market
began the period at $93.68, dipped down to $89.44 at the end of February as
broader markets sold off, and rallied hard to end the period with an average
price of $97.17.
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
Default Rates
During the period, default rates increased within both the JP Morgan High-Yield
Bond Universe and the S&P/LSTA Leveraged Loan Index. Default rates within the
high-yield bond market ended the period at 3.59% compared to the 2.21% default
rate one year ago. Default activity was driven higher by companies in the energy
and metals/mining industries as commodity prices were volatile during this time.
Excluding those industries, the trailing twelve month default rate was a mere
0.46%. A similar theme was experienced within the senior loan market, though far
less dramatic, as the senior loan market has lower exposure to those industries.
The trailing 12-month senior loan default rates ended the period at 1.95%
compared to the 1.27% default rate one year ago.
We believe that default rates may trend lower given the strength of corporate
balance sheets today, the lack of near-term debt maturities, access to robust
capital markets, and our view that the commodity sector has bottomed within the
senior loans and high-yield bond markets. Our prior view regarding default rates
within the high-yield bond and senior loan markets was correct, as corporate
defaults did in fact increase, but were contained within these cyclical
commodity sectors and not systemic to the overall market.
FUND PERFORMANCE
The Fund returned 4.43% on a net asset value ("NAV") basis and 4.21% on a market
price basis over the last 12 months, underperforming the S&P/LSTA Leveraged Loan
100 Index (the "Index") return of 6.81% over the same time period. As of October
31, 2016, the Fund had a 4 star overall Morningstar rating among 241 funds in
the Bank Loan category (3 years).
The Fund's most recent monthly distribution of $0.15 per share was $0.01/share
lower than the monthly distribution paid in October 2015. At the end of the
period, the effective yield based on the distributions for the trailing 12
months was 3.77%. As senior loan and high-yield bond prices have increased,
their yields have commensurately decreased. As a result, we believe this has
been a primary driver of the decreasing monthly distribution.
The Fund's allocation to high-yield bonds was the main driver of positive
performance contributing to returns in the period as high-yield bonds
outperformed senior loans. The Fund entered the period with a 12.31% allocation
to high-yield bonds and ended the period with a 6.77% allocation to high-yield
bonds. High-yield bond spreads tightened dramatically over the past year making
senior loans appear much more attractive on a relative basis. As a result, we
decreased the Fund's weighting in high-yield bonds and increased the Fund's
weighting in senior secured, floating-rate loans. Additionally, the Fund's
underweight allocation to the underperforming utilities industry was a
contributor to performance. More defensive industries, such as the utilities
industry, tend to lag during periods of market tightening due to the defensive
non-cyclical nature of the industry, and this cycle was no different, as the
utilities industry only returned 2.90% within the broader Index during the
period.
More than offsetting those benefits to performance was the Fund's above average
level of cash during the prior year period due to the significant growth of the
Fund. The Fund grew its assets by over 63% relative to the prior year.
Furthermore, the Fund was overweight the more defensive healthcare industry,
which underperformed the overall Index over the course of the prior year. For
reference, the healthcare industry returned 5.08% within the broader Index
during the period and again, these defensive industries tend to lag during
periods of market tightening. Within the healthcare industry, pharmaceuticals
were specifically under pressure as there were various high profile
Congressional hearings into drug pricing practices and potential policy threats
from the Presidential nominees to regulate drug pricing in the industry.
Finally, hospitals were under pressure and experienced slowing admissions growth
from the impact of the implementation of the Affordable Care Act, which has
since stabilized.
MARKET AND FUND OUTLOOK
Looking ahead to 2017, we believe the market is not pricing in the potential for
higher inflation in the U.S. Commodity inflation remains relatively benign and,
unless global central bank activity shifts to a tightening posture (reduced
quantitative easing), we believe that even improving wage inflation will not
cause the Fed to move towards a more aggressive pace of rate increases. However,
we will continue to monitor inflation closely due to the potential impact on the
yield curve, which has flattened significantly this year. In this case, the
flattening yield curve has been significantly influenced by the U.S. Fed slowly
increasing rates, coupled with foreign demand for U.S. bonds tamping down long
term interest rates, which may mitigate the typical concerns associated with a
flattening curve.
High-yield bond spreads over U.S. Treasuries are tight to historical norms at
T+491 basis points ("bps") as of October 31, 2016. The long-term average spread
over U.S. Treasuries is T+595 bps (December 1997 - October 2016). From the
recent spread highs of T+777 bps at January 31, 2016, high-yield spreads have
tightened significantly, and, as a result, valuations have normalized from the
significantly depressed levels early in the year. When considering the
high-yield bond spread relative to valuations within the senior loan market,
Page 6
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
where the discounted spread to a three-year life was L+492 bps at the end of
October, we have viewed this relationship as an opportunity to reduce exposure
to high-yield bonds and migrate some exposure into secured, floating-rate senior
loans. High-yield bond spreads still remain wide of the tight spreads of T+245
bps in May 2007, and as such, we do continue to find value in certain parts of
the market.
After several years of senior loan outflows, retail investors have finally begun
to find favor with the senior loan asset class. According to JP Morgan, the
senior loan asset class ended the period with four consecutive monthly inflows
totaling $4.2 billion. The senior loan asset class has not experienced a string
of inflows like this since a stretch of 21 consecutive monthly inflows between
July 2012 and March 2014. Flows out of the asset class for the year-to-date
period now sit at -$2.2 billion, compared to -$21.7 billion in 2015 and -$23.8
billion in 2014. We believe there are several factors that are contributing to
the positive inflow trend. First, LIBOR has been increasing and has climbed from
61 bps to 88 bps year-to-date. For reference, LIBOR was a mere 33 bps one year
ago. We believe the increase in LIBOR has increased the attractiveness of senior
loans, especially when compared to longer duration, high interest rate risk
bonds. Moreover, we believe that with the potential for additional interest rate
hikes on the horizon, LIBOR should continue to migrate higher. Additionally,
current senior loan spreads compare favorably to the pre-credit crisis average
spread of L+372 (December 1997 - June 2007) and remain in-line with the
long-term average spread of L+526 (December 1997 - October 2016). We believe
senior loans, given their senior secured position in the capital structure,
floating interest rate, attractive income and low default rate are
well-positioned as we move through the remainder of 2016 and into 2017.
We believe that in the near term, volatility may be elevated due to the
headwinds identified above but, at this point in the economic cycle, it will
likely be short lived. As a result, we believe near term volatility should
provide compelling opportunities in the U.S. high-yield bond and senior loan
markets and specifically within actively managed strategies where opportunities
can be taken advantage of and risk can be appropriately managed. We believe
credit selection will be paramount to driving strong returns over the remainder
of this economic cycle. In the early years of the economic recovery, returns
came relatively easily. We believe returns can still be healthy for this portion
of the cycle, however, they will be harder to come by, with greater volatility
in the markets. In a market where equity volatility is high, we believe
investors may benefit from moving up the corporate capital structure into
high-yield bonds and senior loans, where competitive yields and lower volatility
are typical. As we evaluate new investment opportunities, decisions will
continue to be rooted in our rigorous bottom-up credit analysis and focus on the
opportunities that we believe offer the best risk and reward balance. Despite
the many distractions that ebb and flow every quarter, we remain firmly focused
on finding value in the high-yield bond and senior loan markets.
Page 7
FIRST TRUST SENIOR LOAN FUND (FTSL)
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust Senior Loan Fund (the "Fund"), you incur two
types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
MAY 1, 2016 OCTOBER 31, 2016 PERIOD PERIOD (a)
-------------------------------------------------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
Actual $1,000.00 $1,025.20 0.85% $4.33
Hypothetical (5% return before expenses) $1,000.00 $1,020.86 0.85% $4.32
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (May 1,
2016 through October 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 8
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS -- 88.0%
AEROSPACE & DEFENSE -- 1.3%
$ 400,000 B/E Aerospace, Inc., Term Loan B................................ 3.76% - 3.86% 12/16/21 $ 402,252
1,990,389 TransDigm, Inc., Term Loan E.................................... 3.75% 05/14/22 1,982,348
5,576,433 TransDigm, Inc., Term Loan F - Extended......................... 3.75% 06/09/23 5,552,065
---------------
7,936,665
---------------
AGRICULTURAL PRODUCTS -- 0.1%
746,173 Darling International, Inc., Term B USD Loan.................... 3.25% 01/06/21 748,509
---------------
ALTERNATIVE CARRIERS -- 0.7%
1,000,000 Level 3 Financing, Inc., Term Loan B-3.......................... 4.00% 08/01/19 1,004,290
1,420,000 Level 3 Financing, Inc., Tranche B 2020 Term Loan............... 4.00% 01/15/20 1,426,390
1,517,837 Level 3 Financing, Inc., Tranche B-II 2022 Term Loan............ 3.50% 05/31/22 1,523,528
---------------
3,954,208
---------------
ALUMINUM -- 0.3%
1,997,475 Novelis Inc., Term Loan B....................................... 4.00% - 4.09% 06/02/22 2,002,468
---------------
APPAREL RETAIL -- 0.4%
2,749,152 Neiman Marcus Group, (The), Inc. Other Term Loan................ 4.25% 10/25/20 2,525,783
---------------
APPLICATION SOFTWARE -- 2.4%
2,928,728 Epicor Software Corp., Term B Loan.............................. 4.75% 06/01/22 2,893,027
2,559,089 Infor (US), Inc. , Tranche B-5 Term Loan........................ 3.75% 06/03/20 2,550,874
1,408,846 Informatica Corp. (Ithacalux S.A.R.L.), Dollar Term Loan........ 4.50% 08/05/22 1,382,177
995,960 JDA Software Group (RP Crown Parent, Inc.), Term Loan B......... 4.50% 09/21/23 995,252
2,784,000 Kronos, Inc., Term Loan (First Lien)............................ 5.00% 10/31/23 2,795,081
3,565,828 Mitchell International, Inc., Initial Term Loan................. 4.50% 10/13/20 3,551,351
188,038 Triple Point Technologies, Inc., Term Loan B.................... 5.25% 07/10/20 167,824
---------------
14,335,586
---------------
ASSET MANAGEMENT & CUSTODY BANKS -- 0.3%
548,050 Guggenheim Partners Investment Management Holdings LLC,
Term Loan B.................................................. 3.50% 07/22/23 548,851
951,538 Hamilton Lane Advisors LLC, Term B Loan......................... 4.25% 07/08/22 953,518
394,521 Victory Capital Holdings (VCH Holdings LLC), Initial
Term Loan.................................................... 8.50% 10/29/21 389,490
---------------
1,891,859
---------------
AUTO PARTS & EQUIPMENT -- 0.2%
1,122,667 Cooper Standard Holdings (CS Intermediate Holdco 2 LLC),
Term Loan B.................................................. 3.50% 11/02/23 1,125,473
320,722 Tower Automotive Holdings USA LLC, Initial Term
Loan (2014).................................................. 4.00% 04/23/20 319,920
---------------
1,445,393
---------------
AUTOMOTIVE RETAIL -- 0.1%
687,244 KAR Auction Services, Inc., Tranche B-3 Term Loan............... 4.38% 03/09/23 694,330
---------------
BROADCASTING -- 2.5%
680,071 Media General, Inc., Term Loan B................................ 4.00% 07/31/20 679,928
65,291 Nexstar Broadcasting, Inc., Mission Term Loan................... 3.88% 10/31/23 65,536
734,709 Nexstar Broadcasting, Inc., Nexstar Term Loan................... 3.88% 10/31/23 737,464
159,360 Tribune Media Co., Term B Loan.................................. 3.75% 12/27/20 160,117
2,019,377 Univision Communications, Inc., 2013 Incremental Term Loan...... 4.00% 03/01/20 2,021,275
11,438,923 Univision Communications, Inc., Replacement First-Lien
Term Loan.................................................... 4.00% 03/01/20 11,456,767
---------------
15,121,087
---------------
See Notes to Financial Statements Page 9
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
BUILDING PRODUCTS -- 0.9%
$ 262,172 Jeld-Wen, Inc., Term Loan B..................................... 4.75% 07/01/22 $ 263,701
5,363,047 Quikrete Holdings, Inc., Initial Loan (First Lien).............. 4.00% 09/28/20 5,365,300
---------------
5,629,001
---------------
CABLE & SATELLITE -- 1.5%
19,991 Cablevision Systems Corp. (CSC Holdings, Inc.), Initial Term
Loan......................................................... 5.00% 10/04/22 20,025
3,598,430 Cablevision Systems Corp. (CSC Holdings, Inc.), Term Loan B..... 3.75% 10/11/24 3,609,693
1,635,895 Cequel Communications LLC (Altice US Finance I Corp.),
Term Loan B.................................................. 3.88% 01/15/25 1,640,394
3,600,000 UPC Financing Partnership, Term Loan AN......................... 4.08% 08/31/24 3,616,487
---------------
8,886,599
---------------
CASINOS & GAMING -- 6.8%
9,218,828 Amaya Holdings B.V., Initial Term B Loan (First Lien)........... 5.00% 08/01/21 9,205,830
1,000,000 Boyd Gaming Corp., Term Loan B2................................. 3.53% 09/15/23 1,006,940
6,547,436 Caesars Entertainment Resort Properties LLC, Term B Loan........ 7.00% 10/11/20 6,580,173
8,739,333 Caesars Growth Partners LLC, Term B Loan (First Lien)........... 6.25% 05/08/21 8,724,738
7,013,146 CityCenter Holdings LLC , Term B Loan........................... 4.25% 10/16/20 7,049,684
612,308 MGM Growth Properties Operating Partnership LP, Term
Loan B....................................................... 3.50% 04/25/23 613,459
7,281,750 Station Casinos, Inc., Term Loan B.............................. 3.75% 06/08/23 7,312,989
---------------
40,493,813
---------------
COAL & CONSUMABLE FUELS -- 0.0%
84,373 Arch Coal, Inc., PIK Exit Term Loan (c)........................ 10.00% 10/04/21 86,130
---------------
CONSTRUCTION MATERIALS -- 0.1%
345,625 Summit Materials, Inc., Restatement Effective Date Term Loans.. 4.25% 07/15/22 347,785
---------------
CONSUMER FINANCE -- 0.2%
141,412 Altisource Solutions S.A.R.L., Term B Loan...................... 4.50% 12/09/20 136,463
1,046,015 Walter Investment Management Corp., Tranche B Term Loan......... 4.75% 12/18/20 978,024
---------------
1,114,487
---------------
DISTRIBUTORS -- 0.5%
500,000 HD Supply, Inc., New Term Loan B................................ 3.63% 10/17/23 500,315
2,598,375 HD Supply, Inc., Term Loan...................................... 3.59% 08/13/21 2,600,324
---------------
3,100,639
---------------
DIVERSIFIED CHEMICALS -- 0.2%
1,181,991 Ineos US Finance LLC, 2022 Dollar Term Loan..................... 4.25% 03/31/22 1,188,054
---------------
DIVERSIFIED SUPPORT SERVICES -- 0.4%
2,241,701 Brickman Group Holdings, Inc, Initial Term Loan (First Lien).... 4.00% 12/18/20 2,236,724
---------------
EDUCATION SERVICES -- 0.0%
122,813 Bright Horizons Family Solutions, Inc., Term B-1 Loan........... 5.75% 01/30/20 123,120
---------------
ELECTRIC UTILITIES -- 2.6%
1,766,667 Dayton Power & Light Co., Term Loan B........................... 4.00% 08/31/22 1,779,175
607,595 Energy Future Intermediate Holding Co., DIP Term Loan........... 4.25% 06/30/17 610,761
10,732,286 TEX Operations Co. LLC, Exit Term Loan B (d).................... 5.00% 08/04/23 10,826,192
2,447,714 TEX Operations Co. LLC, Exit Term Loan C (d).................... 5.00% 08/04/23 2,469,132
---------------
15,685,260
---------------
Page 10 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ENVIRONMENTAL & FACILITIES SERVICES -- 0.3%
$ 147,375 PSSI (Packers Holdings LLC), Initial Term B Loan................ 5.00% 12/02/21 $ 147,743
931,985 ServiceMaster Co., Initial Term Loan............................ 4.25% 07/01/21 932,573
778,000 WTG Holdings III Corp. (EWT Holdings III Corp.), Term Loan
(First Lien)................................................. 4.75% 01/15/21 779,945
---------------
1,860,261
---------------
FOOD DISTRIBUTORS -- 0.2%
1,197,000 US Foods, Inc., Term Loan B..................................... 4.00% 06/30/23 1,204,050
---------------
FOOD RETAIL -- 1.9%
10,082,974 Albertsons LLC, New Term Loan B4................................ 4.50% 08/25/21 10,154,361
1,124,078 Albertsons LLC, Term Loan B6.................................... 4.75% 06/22/23 1,135,791
---------------
11,290,152
---------------
HEALTH CARE EQUIPMENT -- 1.8%
778,695 Alere, Inc., Term B Loan........................................ 4.25% 06/15/22 775,339
4,983,187 DJO Finance LLC (ReAble Therapeutics Finance LLC), Initial
Term Loan.................................................... 4.25% 06/08/20 4,927,126
4,922,293 Kinetic Concepts, Inc., Term Loan F............................. 5.00% 11/01/20 4,956,159
---------------
10,658,624
---------------
HEALTH CARE FACILITIES -- 4.1%
271,034 Acadia Healthcare Co., Inc., Term Loan B1....................... 3.75% 02/11/22 271,034
992,500 Acadia Healthcare Co., Inc., Term Loan B2....................... 3.75% 02/15/23 995,398
7,070,951 CHS/Community Health Systems, Inc., Incremental 2021
Term H Loan.................................................. 4.00% 01/27/21 6,669,674
1,604,335 Concentra, Inc. (MJ Acquisition Corp.), Term Loan B............. 4.00% - 5.50% 05/15/22 1,594,982
750,000 HCA, Inc., Term Loan B-7........................................ 3.59% 02/11/24 756,353
6,834,642 Kindred Healthcare, Inc., New Term Loan......................... 4.25% 04/09/21 6,828,970
2,000,000 Select Medical Corp., Series E Tranche B Term Loan.............. 6.00% 06/01/18 2,003,760
5,168,979 Select Medical Corp., Term Loan F............................... 6.00% - 7.50% 02/28/21 5,190,534
---------------
24,310,705
---------------
HEALTH CARE SERVICES -- 5.2%
1,181,033 21st Century Oncology, Inc., Tranche B Term Loan................ 7.13% 04/30/22 1,086,550
1,730,619 Air Medical Group Holdings, Inc., Initial Term Loan............. 4.25% 04/28/22 1,714,403
299,250 Air Medical Group Holdings, Inc., 2016 New Term Loan............ 5.00% 04/28/22 301,494
514,583 AMAG Pharmaceuticals, Inc., Initial Term Loan................... 4.75% 08/17/21 514,583
2,674,554 CareCore National LLC, Term Loan................................ 5.50% 03/05/21 2,627,749
1,393,000 CHG Healthcare Services, Inc., Term Loan B...................... 4.75% 06/07/23 1,403,099
2,462,500 Curo Health Services Holdings, Inc., Term B Loan (First Lien)... 6.50% 02/07/22 2,467,622
1,488,750 Envision Healthcare Corp. (Emergency Medical Services Corp.),
Tranche B-2 Term Loan........................................ 4.50% 10/28/22 1,493,410
2,800,000 ExamWorks Group, Inc., Term Loan B.............................. 4.75% 07/27/23 2,816,324
3,272,193 Healogics, Inc. (CDRH Parent, Inc.), Initial Term Loan
(First Lien)................................................. 5.25% 07/01/21 2,568,672
3,013,367 Surgery Centers Holdings, Inc., Term Loan B..................... 4.75% 11/03/20 3,020,900
1,805,833 Surgical Care Affiliates LLC, Term Loan B....................... 3.75% 03/17/22 1,810,348
3,976,895 Team Health, Inc., Term Loan B.................................. 3.75% 11/23/22 3,980,633
5,490,952 U.S. Renal Care, Inc., Term Loan B.............................. 5.25% 12/30/22 5,252,426
---------------
31,058,213
---------------
HEALTH CARE SUPPLIES -- 0.1%
436,170 ConvaTec, Inc., Term Loan B..................................... 3.25% 10/25/23 436,899
---------------
See Notes to Financial Statements Page 11
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HEALTH CARE TECHNOLOGY -- 0.4%
$ 2,443,990 Cotiviti Corp., Term Loan B..................................... 3.61% 09/28/23 $ 2,445,530
---------------
HOTELS, RESORTS & CRUISE LINES -- 1.8%
2,920,000 Extended Stay America (ESH Hospitality, Inc.), Term Loan B...... 3.75% 08/31/23 2,934,980
7,953,295 Hilton Worldwide Finance LLC, Term Loan B2...................... 3.03% 10/26/23 7,990,357
---------------
10,925,337
---------------
HOUSEHOLD PRODUCTS -- 0.1%
416,077 Spectrum Brands, Inc., Term Loan B.............................. 3.25% - 5.00% 06/23/22 419,405
---------------
HYPERMARKETS & SUPER CENTERS -- 2.1%
728,758 BJ's Wholesale Club, Inc., 2013 (November) Replacement Loan
(Second Lien)................................................ 8.50% 03/26/20 730,580
11,701,622 BJ's Wholesale Club, Inc., New 2013 (November) Replacement
Loan (First Lien)............................................ 4.50% 09/26/19 11,712,622
---------------
12,443,202
---------------
INDUSTRIAL CONGLOMERATES -- 0.5%
3,340,278 Gardner Denver, Inc., Initial Dollar Term Loan.................. 4.25% 07/30/20 3,239,302
---------------
INSURANCE BROKERS -- 1.7%
452,004 Amwins Group LLC, Term Loans (First Lien)....................... 4.75% 09/06/19 454,404
4,166,667 Confie Seguros Holding II Co., Term Loan B...................... 5.75% 04/19/22 4,118,042
2,320,677 HUB International Ltd., Initial Term Loan (New)................. 4.00% 10/02/20 2,319,076
1,944,034 National Financial Partners Corp., 2014 Specified Refinancing
Term Loan.................................................... 4.50% 07/01/20 1,947,377
1,336,076 USI, Inc. (Compass Investors, Inc.), Initial Term Loan.......... 4.25% 12/27/19 1,335,796
---------------
10,174,695
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 1.6%
5,012,682 Numericable U.S. LLC (Altice France S.A.), Term Loan B10........ 4.04% 01/14/25 5,012,682
4,609,574 Numericable U.S. LLC (Altice France S.A.), USD Term
Loan B-7..................................................... 5.14% 01/15/24 4,647,603
---------------
9,660,285
---------------
LEISURE FACILITIES -- 0.7%
2,075,755 ClubCorp Club Operations, Inc. , Term Loan B.................... 4.00% 12/15/22 2,085,262
741,056 Life Time Fitness, Inc., Closing Date Term Loan................. 4.25% 06/10/22 740,477
1,117,121 Planet Fitness Holdings LLC, Term Loan.......................... 4.50% 03/31/21 1,117,121
---------------
3,942,860
---------------
LIFE SCIENCES TOOLS & SERVICES -- 3.5%
4,260,294 Immucor, Inc., Term B-2 Loan.................................... 5.00% 08/19/18 4,158,047
5,833,333 InVentiv Health, Inc., Term Loan B.............................. 4.75% 11/09/23 5,830,183
391,099 Millennium Laboratories LLC (New Millennium Holdco.),
Closing Date Term Loan....................................... 7.50% 12/21/20 245,739
3,515,032 Ortho-Clinical Diagnostics, Inc. (Crimson Merger Sub, Inc.),
Initial Term Loan............................................ 4.75% 06/30/21 3,430,074
5,876,289 Pharmaceutical Product Development, Inc., Initial Term Loan..... 4.25% 08/18/22 5,866,827
990,000 Sterigenics International (STHI Intermediate Holding Corp.),
Initial Term Loan............................................ 4.25% 05/16/22 985,050
---------------
20,515,920
---------------
MANAGED HEALTH CARE -- 1.5%
8,580,609 MultiPlan, Inc. (MPH Acquisition Holdings LLC), Term
Loan B....................................................... 5.00% 06/15/23 8,669,075
---------------
Page 12 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
METAL & GLASS CONTAINERS -- 1.3%
$ 1,017,532 Anchor Glass Container Corp., Term B Loan....................... 4.75% 07/01/22 $ 1,026,751
2,159,456 Ardagh Holdings USA, Inc. (Ardagh Packaging Finance S.A.),
Term Loan B.................................................. 4.00% 12/17/21 2,179,020
4,359,997 Berlin Packaging LLC, Initial Term Loan (First Lien)............ 4.50% 10/01/21 4,376,347
---------------
7,582,118
---------------
MOVIES & ENTERTAINMENT -- 1.0%
215,000 AMC Entertainment, Inc., Term Loan B............................ 3.75% 12/15/22 215,000
420,000 AMC Entertainment, Inc., Term Loan B1........................... 3.36% 12/15/23 421,386
393,025 Creative Artists Agency LLC (CAA Holdings LLC), Term
Loan B....................................................... 5.00% 12/17/21 395,481
3,096,141 Formula One (Delta 2 Lux S.A.R.L.), Facility B3 (USD)........... 4.75% 07/30/21 3,100,444
1,260,000 Live Nation Entertainment, Inc. Term Loan B..................... 3.34% 10/31/23 1,260,000
365,130 WME IMG Worldwide, Inc., Term Loan (First Lien)................. 5.25% 05/06/21 366,682
---------------
5,758,993
---------------
OIL & GAS EXPLORATION & PRODUCTION -- 0.0%
400,000 American Energy Marcellus Holdings LLC (Ascent Resources -
Marcellus LLC), Initial Loan (First Lien).................... 5.25% 08/04/20 225,252
361,111 American Energy Marcellus Holdings LLC (Ascent Resources -
Marcellus LLC), Initial Loan (Second Lien)................... 8.50% 08/04/21 32,049
---------------
257,301
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES -- 1.7%
6,956,656 First Data Corp., 2021C New Dollar Term Loan.................... 3.52% 03/24/21 6,984,482
3,192,000 Wex, Inc., Term Loan B.......................................... 4.25% 06/30/23 3,225,931
---------------
10,210,413
---------------
PACKAGED FOODS & MEATS -- 3.3%
5,000,000 Amplify Snack Brands, Inc., Term Loan B......................... 6.50% 08/31/23 4,982,800
1,664,286 B&G Foods, Inc., Tranche B Term Loan............................ 3.84% 11/02/22 1,678,149
10,679,593 New HB Acquisition LLC, Term B Loan (First Lien)................ 4.50% 08/03/22 10,749,651
2,020,649 New HB Acquisition LLC, Term B Loan (Second Lien)............... 8.50% 08/03/23 2,032,025
---------------
19,442,625
---------------
PAPER PACKAGING -- 2.2%
12,914,636 Reynolds Group Holdings, Inc., 2016 US Term Loan................ 4.25% 02/05/23 12,943,435
---------------
PHARMACEUTICALS -- 7.0%
1,128,313 Akorn, Inc., Loan............................................... 5.25% 04/16/21 1,135,365
2,101,453 Amneal Pharmaceuticals LLC, Term Loan B......................... 4.50% - 6.00% 11/01/19 2,113,285
651,669 Catalent Pharma Solutions, Inc., Dollar Term Loan............... 4.25% 05/20/21 654,745
7,736,790 Concordia Healthcare Corp., Initial Dollar Term Loan............ 5.25% 10/21/21 6,920,249
9,594,825 Endo Pharmaceuticals Holdings, Inc., 2015 Incremental
Term B Loan.................................................. 3.75% 09/25/22 9,579,281
1,200,000 Horizon Pharma, Inc., Incremental Term Loan..................... 5.50% 05/07/21 1,201,500
4,018,272 Horizon Pharma, Inc., Term Loan B............................... 4.50% 04/30/21 4,018,272
1,583,949 Patheon, Inc. (JLL/Delta Dutch Newco B.V.), Initial Dollar
Term Loan.................................................... 4.25% 03/11/21 1,584,614
14,683,871 Valeant Pharmaceuticals International, Inc., Series F-1
Tranche B Term Loan.......................................... 5.50% 04/01/22 14,628,806
---------------
41,836,117
---------------
See Notes to Financial Statements Page 13
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PROPERTY & CASUALTY INSURANCE -- 0.2%
$ 378,106 Cunningham Lindsey U.S., Inc., Initial Term Loan (First Lien)... 5.00% 12/10/19 $ 316,350
600,000 Sedgwick Claims Management Services, Inc., Initial Loan
(Second Lien)................................................ 6.75% 02/28/22 594,750
---------------
911,100
---------------
REAL ESTATE SERVICES -- 2.0%
11,200,966 DTZ Worldwide LTD., 2015-1 Additional Term Loan................. 4.25% 11/04/21 11,168,259
441,793 Realogy Corp., Term Loan B...................................... 3.75% 07/07/22 445,199
---------------
11,613,458
---------------
RESEARCH & CONSULTING SERVICES -- 2.9%
8,070,255 Acosta, Inc., Term Loan B....................................... 4.25% 09/26/21 7,755,515
7,943,994 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)................................................. 4.25% 07/23/21 7,861,217
402,431 Information Resources, Inc., Term Loan.......................... 4.75% 09/30/20 403,940
1,185,497 TransUnion LLC, 2015 Term B-2 Loan.............................. 3.50% 04/09/21 1,188,461
---------------
17,209,133
---------------
RESTAURANTS -- 3.2%
2,389,585 Burger King Corp. (1011778 B.C. ULC), Term B-2 Loan............. 3.75% 12/10/21 2,399,550
2,345,009 Focus Brands, Inc., Term Loan................................... 5.00% 10/05/23 2,369,444
4,220,000 Landry's Restaurants, Inc., Term Loan B......................... 4.00% 10/04/23 4,242,873
9,418,214 Portillo's Holdings LLC, Term B Loan (First Lien)............... 5.50% 08/02/21 9,341,738
420,000 Red Lobster Management LLC, Initial Term Loan (First Lien)...... 6.25% 07/28/21 421,575
---------------
18,775,180
---------------
SECURITY & ALARM SERVICES -- 0.2%
247,627 Garda World Security Corp., Term Loan B......................... 4.00% 11/06/20 244,428
965,509 Garda World Security Corp., Term Loan B......................... 4.00% 10/18/20 953,035
---------------
1,197,463
---------------
SEMICONDUCTORS -- 2.6%
8,186,593 Avago Technologies Cayman Ltd. (BC Luxembourg S.A.R.L.),
Term Loan B3................................................. 3.53% 02/01/23 8,267,314
1,522,469 Micron Technology, Inc., Term Loan B............................ 4.29% 04/26/22 1,531,041
3,621,073 NXP B.V., Tranche F Term Loan................................... 3.41% 12/07/20 3,632,153
1,875,300 Western Digital Corp., Term Loan B.............................. 4.50% 08/31/23 1,895,384
---------------
15,325,892
---------------
SOFT DRINKS -- 1.0%
5,772,980 Keurig Green Mountain, Inc. (Maple Holdings Acquisition
Corp.), Term B USD Loan...................................... 5.25% 03/03/23 5,843,699
---------------
SPECIALIZED CONSUMER SERVICES -- 1.7%
746,173 Aramark Corp., Term Loan F...................................... 3.34% 02/24/21 749,904
950,546 Asurion LLC, Incremental Tranche B-1 Term Loan.................. 5.00% 05/24/19 950,717
4,457,059 Asurion LLC, Incremental Tranche B-4 Term Loan.................. 5.00% 08/04/22 4,476,580
352,941 Asurion LLC, Term Loan (Second Lien)............................ 8.50% 03/03/21 355,440
3,297,099 Asurion LLC, Term Loan B5....................................... 4.75% 11/03/23 3,280,613
---------------
9,813,254
---------------
SPECIALIZED FINANCE -- 1.3%
4,386,000 AlixPartners LLP, Term Loan B................................... 4.00% 07/28/22 4,392,842
3,148,631 Duff & Phelps Corp., Initial Term Loan.......................... 4.75% 04/23/20 3,151,244
---------------
7,544,086
---------------
Page 14 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALTY CHEMICALS -- 0.2%
$ 1,145,590 Platform Specialty Products Corp. (fka: Macdermid, Inc.),
Term Loan B.................................................. 5.00% 10/31/23 $ 1,154,182
263,333 Trinseo Materials Operating S.C.A., Term Loan B................. 4.25% 11/05/21 264,849
---------------
1,419,031
---------------
SPECIALTY STORES -- 2.6%
629,054 Coinstar, Inc., Term Loan B..................................... 5.25% 09/27/23 634,822
227,842 Dollar Tree, Inc., Term Loan B.................................. 3.06% 07/06/22 229,836
1,932,629 Party City Holdings, Inc., Term Loan B.......................... 3.75% - 4.24% 08/19/22 1,937,731
10,924,159 PetSmart, Inc., Term Loan B..................................... 4.00% 03/10/22 10,945,570
483,778 Toys "R" US-Delaware, Inc., Term B-2 Loan....................... 5.25% 05/25/18 453,943
1,282,202 Toys "R" US-Delaware, Inc., Term B4 Loan........................ 9.75% 04/25/20 1,170,817
---------------
15,372,719
---------------
SYSTEMS SOFTWARE -- 2.2%
261,610 Applied Systems, Inc., Initial Term Loan (First Lien)........... 4.00% 01/25/21 262,002
218,154 Applied Systems, Inc., Initial Term Loan (Second Lien).......... 7.50% 01/24/22 219,450
1,978,261 Avast Software B.V. (Sybil Software LLC), Initial Dollar Term
Loan......................................................... 5.00% 09/30/22 1,996,065
5,419,675 BMC Software Finance, Inc., Initial US Term Loan................ 5.00% 09/10/20 5,333,285
1,401,820 Compuware Corp., Term Loan B.................................... 6.25% 12/15/19 1,404,890
416,667 Misys Ltd., Term Loan B......................................... 3.25% 10/15/23 419,792
225,000 Rocket Software, Inc., Term Loan................................ 5.25% 10/14/23 225,938
464,340 SS&C Technologies Holdings, Inc., Term B-1 Loan................. 4.00% 07/08/22 467,679
56,510 SS&C Technologies Holdings, Inc., Term B-2 Loan................. 4.00% 07/08/22 56,916
2,400,000 Vertafore, Inc., Term Loan...................................... 4.75% 06/30/23 2,407,128
220,000 Virtu Financial, Inc., Term Loan B.............................. 4.25% 11/30/23 220,414
---------------
13,013,559
---------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS -- 2.4%
11,833,333 Dell, Inc. (Diamond 1 Finance Corp.), Term Loan B............... 4.00% 09/07/23 11,914,155
2,196,321 Vertiv, Inc. (Cortes NP Acquisition), Term Loan B............... 6.00% 10/15/23 2,182,594
---------------
14,096,749
---------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS.................................................... 522,968,340
(Cost $524,148,748) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS -- 4.9%
ALTERNATIVE CARRIERS -- 0.2%
813,000 Level 3 Communications, Inc..................................... 5.75% 12/01/22 839,423
500,000 Level 3 Financing, Inc.......................................... 5.13% 05/01/23 506,250
---------------
1,345,673
---------------
APPLICATION SOFTWARE -- 0.1%
500,000 Infor US, Inc................................................... 6.50% 05/15/22 519,375
---------------
AUTO PARTS & EQUIPMENT -- 0.0%
125,000 MPG Holdco I, Inc............................................... 7.38% 10/15/22 127,969
---------------
BROADCASTING -- 0.1%
125,000 LIN Television Corp............................................. 5.88% 11/15/22 131,406
100,000 Nexstar Broadcasting, Inc. (e).................................. 6.13% 02/15/22 103,000
See Notes to Financial Statements Page 15
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS (CONTINUED)
BROADCASTING (CONTINUED)
$ 215,000 Sinclair Television Group, Inc. (e)............................. 5.88% 03/15/26 $ 222,525
---------------
456,931
---------------
CABLE & SATELLITE -- 0.5%
2,350,000 CCO Holdings LLC / CCO Holdings Capital Corp.................... 5.75% 01/15/24 2,490,999
600,000 CCO Holdings LLC / CCO Holdings Capital Corp. (e)............... 5.88% 04/01/24 636,000
---------------
3,126,999
---------------
CASINOS & GAMING -- 0.1%
600,000 Caesars Growth Properties Holdings LLC / Caesars Growth
Properties Finance, Inc...................................... 9.38% 05/01/22 640,500
---------------
DIVERSIFIED REAL ESTATE ACTIVITIES -- 0.1%
250,000 KB Home......................................................... 7.00% 12/15/21 269,375
250,000 Taylor Morrison Communities Inc. / Monarch Communities,
Inc. (e)..................................................... 5.88% 04/15/23 265,000
---------------
534,375
---------------
HEALTH CARE EQUIPMENT -- 0.2%
83,000 Alere, Inc...................................................... 6.50% 06/15/20 84,487
1,000,000 Alere, Inc. (e)................................................. 6.38% 07/01/23 1,035,000
---------------
1,119,487
---------------
HEALTH CARE FACILITIES -- 2.7%
3,165,000 CHS/Community Health Systems, Inc............................... 6.88% 02/01/22 2,429,137
605,000 HCA, Inc........................................................ 5.38% 02/01/25 618,280
1,750,000 Kindred Healthcare, Inc......................................... 8.00% 01/15/20 1,741,250
1,500,000 Select Medical Corp............................................. 6.38% 06/01/21 1,488,750
1,800,000 Tenet Healthcare Corp........................................... 5.00% 03/01/19 1,754,441
170,000 Tenet Healthcare Corp........................................... 6.00% 10/01/20 179,500
7,750,000 Tenet Healthcare Corp........................................... 8.13% 04/01/22 7,614,374
---------------
15,825,732
---------------
HEALTH CARE SERVICES -- 0.1%
761,000 Surgical Care Affiliates, Inc. (e).............................. 6.00% 04/01/23 795,245
---------------
HOMEFURNISHING RETAIL -- 0.1%
500,000 Serta Simmons Bedding LLC (e)................................... 8.13% 10/01/20 519,713
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS -- 0.0%
150,000 NRG Energy, Inc................................................. 7.88% 05/15/21 157,500
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.0%
110,000 Frontier Communications Corp.................................... 6.25% 09/15/21 105,050
---------------
LIFE SCIENCES TOOLS & SERVICES -- 0.3%
2,375,000 Ortho-Clinical Diagnostics, Inc. / Ortho-Clinical
Diagnostics SA (e)........................................... 6.63% 05/15/22 2,042,500
---------------
OIL & GAS STORAGE & TRANSPORTATION -- 0.1%
300,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp................................................. 6.13% 03/01/22 308,250
---------------
PACKAGED FOODS & MEATS -- 0.1%
125,000 Post Holdings, Inc. (e)......................................... 6.75% 12/01/21 134,063
150,000 Post Holdings, Inc. (e)......................................... 7.75% 03/15/24 166,530
---------------
300,593
---------------
Page 16 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS (CONTINUED)
PAPER PACKAGING -- 0.0%
$ 250,000 Reynolds Group Issuer, Inc. / Reynolds Group Issuer LLC /
Reynolds Group Issuer Lu (e) (f)............................. 4.38% 07/15/21 $ 255,625
---------------
TRADING COMPANIES & DISTRIBUTORS -- 0.0%
209,000 BlueLine Rental Finance Corp. (e)............................... 7.00% 02/01/19 183,398
---------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.2%
250,000 Sprint Communications, Inc. (e)................................. 9.00% 11/15/18 275,625
150,000 T-Mobile USA, Inc............................................... 6.00% 03/01/23 158,250
500,000 T-Mobile USA, Inc............................................... 6.63% 04/01/23 532,590
---------------
966,465
---------------
TOTAL CORPORATE BONDS........................................................................ 29,331,380
(Cost $30,645,682) ---------------
FOREIGN CORPORATE BONDS -- 1.2%
AEROSPACE & DEFENSE -- 0.0%
250,000 Bombardier, Inc. (e)............................................ 7.75% 03/15/20 255,000
---------------
ALTERNATIVE CARRIERS -- 0.1%
600,000 Intelsat Luxembourg SA.......................................... 6.75% 06/01/18 414,000
---------------
CABLE & SATELLITE -- 0.4%
690,000 Ziggo Bond Finance BV (e)....................................... 6.00% 01/15/27 679,219
2,000,000 Ziggo Secured Finance BV (e).................................... 5.50% 01/15/27 1,980,000
---------------
2,659,219
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.2%
1,000,000 SFR Group SA (e)................................................ 6.00% 05/15/22 1,029,070
---------------
METAL & GLASS CONTAINERS -- 0.1%
373,588 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (e)..................................................... 7.00% 11/15/20 386,664
250,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (e)..................................................... 7.25% 05/15/24 265,000
---------------
651,664
---------------
PACKAGED FOODS & MEATS -- 0.1%
639,000 JBS USA LLC / JBS USA Finance, Inc. (e)......................... 5.88% 07/15/24 645,390
---------------
PHARMACEUTICALS -- 0.2%
552,000 Capsugel SA (e) (g)............................................. 7.00% 05/15/19 552,276
250,000 Mallinckrodt International Finance SA / Mallinckrodt CB
LLC (e)...................................................... 5.63% 10/15/23 236,250
350,000 Valeant Pharmaceuticals International, Inc. (e)................. 5.38% 03/15/20 304,500
---------------
1,093,026
---------------
RESTAURANTS -- 0.0%
100,000 1011778 B.C. ULC / New Red Finance, Inc. (e).................... 6.00% 04/01/22 104,750
---------------
SECURITY & ALARM SERVICES -- 0.1%
500,000 Garda World Security Corp. (e).................................. 7.25% 11/15/21 480,000
---------------
TOTAL FOREIGN CORPORATE BONDS................................................................ 7,332,119
(Cost $7,606,812) ---------------
See Notes to Financial Statements Page 17
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS -- 0.1%
COAL & CONSUMABLE FUELS -- 0.1%
6,073 Arch Coal, Inc., Class A (c) (h)............................................................. $ 445,637
---------------
TOTAL COMMON STOCKS.......................................................................... 445,637
(Cost $406,709) ---------------
RIGHTS -- 0.0%
ELECTRIC UTILITIES -- 0.0%
5,210 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) (d) (h)............................. 9,052
8,105 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) Claim (d) (h) (i)................... 0
---------------
9,052
---------------
LIFE SCIENCES TOOLS & SERVICES -- 0.0%
1 New Millennium Holdco, Inc., Corporate Claim Trust (h) (i) (j) (k)........................... 0
1 New Millennium Holdco, Inc., Corporate Claim Trust (h) (i) (j) (k)........................... 0
---------------
0
---------------
TOTAL RIGHTS................................................................................. 9,052
(Cost $9,052) ---------------
MONEY MARKET FUNDS -- 12.7%
75,229,418 BNY Mellon Cash Reserve USD - 0.01% (l)...................................................... 75,229,418
(Cost $75,229,418) ---------------
TOTAL INVESTMENTS -- 106.9%.................................................................. 635,315,946
(Cost $638,046,421) (m)
NET OTHER ASSETS AND LIABILITIES -- (6.9)%................................................... (41,039,137)
---------------
NET ASSETS -- 100.0%......................................................................... $ 594,276,809
===============
-----------------------------
(a) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests generally pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium. These
base lending rates are generally (i) the lending rate offered by one or
more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more United States banks
or (iii) the certificate of deposit rate. Certain Senior Loans are subject
to a LIBOR floor that establishes a minimum LIBOR rate. The interest rate
shown reflects the rate in effect at October 31, 2016. When a range of
rates is disclosed, the Fund holds more than one contract within the same
tranche at varying rates.
(b) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(c) On October 4, 2016, Arch Coal, Inc. completed a Bankruptcy Plan of
Reorganization. In connection with the Plan of Reorganization, each lender
received a portion of a new term loan equal to its closing date term loan
percentage pursuant to the new credit agreement and a pro rata share of
the newly issued common equity shares in the new company. The company also
made a cash distribution to first lien creditors.
(d) On October 3, 2016, Texas Competitive Electric Holdings ("TCEH") completed
their reorganization in the form of a tax free spin off from the parent
company, Energy Future Holdings. As part of the reorganization, first lien
claim holders received equity in a new entity TCEH Corp., cash held by the
new entity, tax receivable rights and a beneficial interest in an
unsecured claim to the parent company, Energy Future Holdings.
(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., (the
"Advisor"). Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At October 31, 2016, securities noted as such
amounted to $13,552,343 or 2.3% of net assets.
(f) Floating or variable rate security. The interest rate shown reflects the
rate in effect at October 31, 2016.
Page 18 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
(g) These notes are Payment-in-Kind ("PIK") Notes whereby the issuer may, at
its option, elect to pay interest on the notes (1) entirely in cash or (2)
entirely in PIK Interest. Interest paid in cash will accrue at the rate of
7.000% per annum ("Cash Interest Rate") and PIK Interest will accrue on
the Notes at a rate per annum equal to the Cash Interest Rate plus 75
basis points. For the fiscal year ended October 31, 2016, this security
paid all of its interest in cash.
(h) Non-income producing security.
(i) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees, and
in accordance with provisions of the Investment Company Act of 1940, as
amended. At October 31, 2016, securities noted as such amounted to $0 or
0.0% of net assets.
(j) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the Advisor.
(k) On December 21, 2015, Millennium Health, LLC completed a Bankruptcy Plan
of Reorganization. As part of the Bankruptcy Plan of Reorganization, the
holders of Millennium Laboratories LLC, Tranche B Term Loan received a
portion of a new term loan and a pro rata share of the newly issued common
equity shares in New Millennium Holdco, Inc., the new company. Each lender
was also issued a beneficial interest in the Corporate Claim Trust
entitling it, as holder of such beneficial interest, to receive Corporate
Claim Trust Distributions when and if net cash proceeds from the pursuit
of Retained Corporate Causes of Action are available to make such a
distribution. In addition, each lender was issued a beneficial interest in
the Lender Claim Trust entitling it, as holder of such beneficial
interest, to receive Lender Claim Trust Distributions when and if net cash
proceeds from the pursuit of Retained Lender Causes of Action are
available to make such a distribution.
(l) Interest rate shown reflects yield as of October 31, 2016.
(m) Aggregate cost for federal income tax purposes is $638,432,540. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$2,981,694 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$6,098,288.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Senior Floating-Rate Loan Interests*.............. $ 522,968,340 $ -- $ 522,968,340 $ --
Corporate Bonds*.................................. 29,331,380 -- 29,331,380 --
Foreign Corporate Bonds*.......................... 7,332,119 -- 7,332,119 --
Common Stocks*.................................... 445,637 445,637 -- --
Rights*........................................... 9,052 -- 9,052 --**
Money Market Funds................................ 75,229,418 75,229,418 -- --
-------------- -------------- -------------- --------------
Total Investments................................. $ 635,315,946 $ 75,675,055 $ 559,640,891 $ --**
============== ============== ============== ==============
* See Portfolio of Investments for industry breakout.
** Investment is valued at $0.
There were no transfers between Level 1 and Level 2.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of October
31, 2016, the Fund transferred Senior Floating-Rate Loan Interests valued at
$316,350 from Level 3 to Level 2 of the fair value hierarchy. The Senior
Floating-Rate Loan Interests that transferred from Level 3 to Level 2 did so
primarily as a result of a change in information obtained from a third-party
pricing service relating to the market activity of individual Senior
Floating-Rate Loan Interests and trading activity in certain Senior
Floating-Rate Loan Interests.
Level 3 Rights that are fair valued by the Advisor's Pricing Committee are
footnoted in the Portfolio of Investments. The Level 3 Rights values are based
on unobservable and non-quantitative inputs. The Trust's Board of Trustees has
adopted valuation procedures that are utilized by the Advisor's Pricing
Committee to oversee the day-to-day valuation of the Fund's investments. The
Advisor's Pricing Committee, through the Fund's fund accounting agent, monitors
the daily pricing via tolerance checks and stale and unchanged price reviews.
The Advisor's Pricing Committee also reviews monthly back testing of third-party
See Notes to Financial Statements Page 19
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
pricing service prices by comparing sales prices of the Fund's investments to
prior day third-party pricing service prices. Additionally, the Advisor's
Pricing Committee reviews periodic information from the Fund's third-party
pricing service that compares secondary market trade prices to their daily
valuations.
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented:
BEGINNING BALANCE AT OCTOBER 31, 2015
Senior Floating-Rate Loan Interests $ 1,413,777
Rights --
Net Realized Gain (Loss)
Senior Floating-Rate Loan Interests 4,214
Rights --
Change in Unrealized Appreciation /(Depreciation)
Senior Floating-Rate Loan Interests 32,803
Rights --
Purchases
Senior Floating-Rate Loan Interests --
Rights --*
Sales
Senior Floating-Rate Loan Interests (1,134,444)
Rights --
Transfers In
Senior Floating-Rate Loan Interests --
Rights --
Transfers Out
Senior Floating-Rate Loan Interests (316,350)
Rights --
--------------
ENDING BALANCE AT OCTOBER 31, 2016
Senior Floating-Rate Loan Interests --
Rights --*
--------------
Total Level 3 holdings $ --*
==============
* Investment is valued at $0.
There was a net change of $0 in unrealized appreciation (depreciation) from
Level 3 investments held as of October 31, 2016.
Page 20 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value..................................................... $ 635,315,946
Receivables:
Investment securities sold............................................. 25,012,087
Capital shares sold.................................................... 2,419,072
Interest............................................................... 1,875,496
--------------
Total Assets........................................................ 664,622,601
--------------
LIABILITIES:
Payables:
Investment securities purchased........................................ 69,936,851
Investment advisory fees............................................... 408,941
--------------
Total Liabilities................................................... 70,345,792
--------------
NET ASSETS................................................................ $ 594,276,809
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 600,637,995
Par value................................................................. 123,000
Accumulated net investment income (loss).................................. 364,642
Accumulated net realized gain (loss) on investments....................... (4,118,353)
Net unrealized appreciation (depreciation) on investments................. (2,730,475)
--------------
NET ASSETS................................................................ $ 594,276,809
==============
NET ASSET VALUE, per share................................................ $ 48.32
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)................................. 12,300,002
==============
Investments, at cost...................................................... $ 638,046,421
==============
See Notes to Financial Statements Page 21
FIRST TRUST SENIOR LOAN FUND (FTSL)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest.................................................................. $ 21,491,890
--------------
Total investment income................................................ 21,491,890
--------------
EXPENSES:
Investment advisory fees.................................................. 3,894,144
--------------
Total expenses......................................................... 3,894,144
--------------
NET INVESTMENT INCOME (LOSS).............................................. 17,597,746
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments................................ (3,392,038)
Net change in unrealized appreciation (depreciation) on investments.... 6,576,924
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 3,184,886
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 20,782,632
==============
Page 22 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
10/31/2016 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 17,597,746 $ 10,823,916
Net realized gain (loss)............................................... (3,392,038) (365,525)
Net change in unrealized appreciation (depreciation)................... 6,576,924 (7,431,519)
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 20,782,632 3,026,872
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (17,619,004) (10,638,104)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 239,911,601 198,520,058
Cost of shares redeemed................................................ (11,697,036) (24,352,367)
-------------- --------------
Net increase (decrease) in net assets resulting
from shareholder transactions....................................... 228,214,565 174,167,691
-------------- --------------
Total increase (decrease) in net assets................................ 231,378,193 166,556,459
NET ASSETS:
Beginning of period.................................................... 362,898,616 196,342,157
-------------- --------------
End of period.......................................................... $ 594,276,809 $ 362,898,616
============== ==============
Accumulated net investment income (loss) at end of period.............. $ 364,642 $ 397,650
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 7,550,002 4,000,002
Shares sold............................................................ 5,000,000 4,050,000
Shares redeemed........................................................ (250,000) (500,000)
-------------- --------------
Shares outstanding, end of period...................................... 12,300,002 7,550,002
============== ==============
See Notes to Financial Statements Page 23
FIRST TRUST SENIOR LOAN FUND (FTSL)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 5/1/2013 (a)
--------------------------------------------------- THROUGH
2016 2015 2014 10/31/2013
--------------- --------------- --------------- ---------------
Net asset value, beginning of period...................... $ 48.07 $ 49.09 $ 49.45 $ 50.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).............................. 1.80 1.90 1.77 0.90
Net realized and unrealized gain (loss)................... 0.27 (1.03) (0.36) (0.45)
----------- ----------- ----------- -----------
Total from investment operations.......................... 2.07 0.87 1.41 0.45
----------- ----------- ----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income..................................... (1.82) (1.89) (1.77) (0.85)
Return of capital......................................... -- -- -- (0.15)
----------- ----------- ----------- -----------
Total distributions paid to shareholders.................. (1.82) (1.89) (1.77) (1.00)
----------- ----------- ----------- -----------
Net asset value, end of period............................ $ 48.32 $ 48.07 $ 49.09 $ 49.45
=========== =========== =========== ===========
TOTAL RETURN (b).......................................... 4.43% 1.75% 2.91% 0.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)...................... $ 594,277 $ 362,899 $ 196,342 $ 96,432
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets............. 0.85% 0.85% 0.85% 0.85% (c)
Ratio of net investment income (loss) to average
net assets............................................. 3.84% 3.97% 3.61% 3.29% (c)
Portfolio turnover rate (d)............................... 67% 71% 97% 51%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 24 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Senior Loan Fund (the "Fund"), which trades under
the ticker "FTSL" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike conventional
mutual funds, the Fund issues and redeems shares on a continuous basis, at net
asset value ("NAV"), only in large specified blocks consisting of 50,000 shares
called a "Creation Unit." Creation Units are generally issued and redeemed for
cash and, in certain circumstances, in-kind for securities in which the Fund
invests. Except when aggregated in Creation Units, the shares are not redeemable
securities of the Fund.
The Fund's primary investment objective is to provide high current income. The
Fund's secondary investment objective is the preservation of capital. The Fund
seeks to outperform each of the S&P/LSTA Leveraged Loan 100 Index and the Markit
iBoxx USD Liquid Leveraged Loan Index by investing at least 80% of its net
assets (including investment borrowings) in, under normal market conditions, a
diversified portfolio of first lien senior floating rate loan interests ("Senior
Loans")(1). A Senior Loan is an advance or commitment of funds made by one or
more banks or similar financial institutions to one or more corporations,
partnerships or other business entities and typically pays interest at a
floating or adjusting rate that is determined periodically at a designated
premium above a base lending rate, most commonly the London Interbank Offered
Rate ("LIBOR"). The Fund invests primarily in Senior Loans that are below
investment grade quality at the time of investment. The Fund invests in Senior
Loans made predominantly to businesses operating in North America, but may also
invest in Senior Loans made to businesses operating outside of North America.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Senior Loans in which the Fund invests are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are valued
using information provided by a third-party pricing service. The
third-party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans.
Corporate bonds, corporate notes and other debt securities are fair valued
on the basis of valuations provided by dealers who make markets in such
securities or by a third-party pricing service approved by the Trust's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Shares of open-end funds are valued at fair value which is based on NAV
per share.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the borrower/issuer, or comparable companies;
8) the coupon payments;
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method over
the expected life of each respective borrowing for loans.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed delivery or forward purchase commitments. The Fund
had no when-issued, delayed-delivery, or forward purchase commitments as of
October 31, 2016.
C. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund had no unfunded commitments as of October 31,
2016.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
Page 27
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income.............................. $ 17,619,004 $ 10,638,104
Capital gain................................. -- --
Return of capital............................ -- --
As of October 31, 2016, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................ $ 364,642
Accumulated capital and other gain (loss).... (3,732,234)
Net unrealized appreciation (depreciation)... (3,116,594)
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. As of October 31, 2016, the
Fund had $3,732,234 of non-expiring capital loss carryforwards that may be
carried forward indefinitely.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2013,
2014, 2015 and 2016 remain open to federal and state audit. As of October 31,
2016, management has evaluated the application of these standards to the Fund
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statement of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of premium amortization and paydown gains and losses on various investment
securities held by the Fund. The results of operations and net assets were not
affected by these adjustments. For the fiscal year ended October 31, 2016, the
adjustments for the Fund were as follows:
ACCUMULATED
ACCUMULATED NET REALIZED
NET INVESTMENT GAIN (LOSS)
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
-------------- -------------- ---------------
$ (11,750) $ 11,750 $ --
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016 the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, acquired
fund fees and expenses, brokerage commissions and other expenses connected with
the execution of portfolio transactions, distribution and service fees pursuant
to a 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay
First Trust an annual unitary management fee equal to 0.85% of its average daily
net assets.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and the Valuation Committee are
paid annual fees to serve in such capacities, with such compensation allocated
pro rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended October 31, 2016, the cost of purchases and proceeds
from sales of investments, excluding short-term investments and in-kind
transactions, were $499,050,653 and $290,704,784, respectively.
For the fiscal year ended October 31, 2016, there were no in-kind transactions.
5. BORROWINGS
The Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund
III and First Trust Series Fund entered into a $140 million Credit Agreement
with The Bank of Nova Scotia ("Scotia") as administrative agent for a group of
lenders. Scotia charges a commitment fee of 0.25% of the daily amount of the
excess of the commitment amount over the outstanding principal balance of the
loans. Prior to March 9, 2016, the commitment was $80 million and the commitment
fee was 0.15%. First Trust allocates the commitment fee amongst the funds that
have access to the credit line. To the extent that the Fund accesses the credit
line, there would also be an interest fee charged. The Fund did not have any
borrowings outstanding during the fiscal year ended October 31, 2016.
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities
determined by First Trust (the "Deposit Securities") and generally make or
receive a cash payment referred to as the "Cash Component," which is an amount
equal to the difference between the NAV of the Fund Shares (per Creation Unit
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. The Fund's Creation Units
are generally issued and redeemed for cash. If the Cash Component is a positive
number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount),
the Authorized Participant 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 Authorized Participant will receive the Cash
Component. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. 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 the 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.
Authorized Participants redeeming Creation Units must pay to BNYM, as transfer
agent, a standard redemption transaction fee (the "Redemption Transaction Fee"),
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 the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 31, 2018.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 21, 2016, the Fund declared a distribution of $0.15 per share to
shareholders of record on November 25, 2016, payable November 30, 2016.
On December 16, 2016, the commitment amount under the Credit Agreement with
Scotia was increased to $180 million.
Page 30
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST SENIOR LOAN FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Senior Loan Fund (the "Fund"), a series of the First Trust Exchange-Traded
Fund IV, including the portfolio of investments, as of October 31, 2016, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2016, by correspondence with the Fund's
custodian, brokers, and agent banks; where replies were not received from
brokers, we performed other auditing procedures. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Senior Loan Fund as of October 31, 2016, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 22, 2016
Page 31
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ADDITIONAL INFORMATION
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FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on Securities
and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
FEDERAL TAX INFORMATION
Distributions paid to foreign shareholders between the period January 1, 2016
and October 31, 2016 that were properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," may not be
subject to federal income tax provided that the income was earned directly by
such foreign shareholders.
For the taxable year ended October 31, 2016, the following percentages of income
dividend paid by the Fund qualify for the dividends received deduction available
to corporations and is hereby designated as qualified dividend income:
Dividends Received Deduction Qualified Dividend Income
--------------------------------- ---------------------------------
0.00% 0.00%
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND IV.
The following summarizes some of the risks that should be considered for the
Fund.
BANK LOAN RISK: An investment in Senior Loans subjects the Fund to credit risk,
which is heightened for Senior Loans in which the Fund invests because companies
that issue such loans tend to be highly leveraged and thus are more susceptible
to the risks of interest deferral, default and/or bankruptcy. Senior Loans are
usually rated below investment grade but may also be unrated. An economic
downturn would generally lead to a higher non-payment rate, and a Senior Loan
may lose significant market value before a default occurs. Moreover, any
specific collateral used to secure a Senior Loan may decline in value or become
illiquid, which would adversely affect the loan's value. Unlike the securities
markets, there is no central clearinghouse for Senior Loan trades, and the
Senior Loan market has not established enforceable settlement standards or
remedies for failure to settle. Therefore, portfolio transactions in Senior
Loans may have uncertain settlement time periods. Senior Loans are subject to a
number of risks described elsewhere in this prospectus, including liquidity risk
and the risk of investing in below investment grade fixed-income instruments.
CALL RISK: If an issuer calls higher-yielding securities held by the Fund,
performance could be adversely impacted.
CASH TRANSACTION RISK: The Fund currently intends to effect a significant
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an exchange-traded fund that effects its creations and redemptions
for in-kind securities. Because the Fund principally effects redemptions for
cash, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. A sale of shares may result in
capital gains or losses, and may also result in higher brokerage costs.
CONVERTIBLE BONDS RISK: The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
CREDIT RISK: Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments. Credit risk may be heightened
for the Fund because it may invest a substantial portion of its net assets in
high yield or "junk" debt; such securities, while generally offering higher
yields than investment-grade debt with similar maturities, involve greater
risks, including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
CURRENCY RISK: Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in foreign securities, you may lose money if
the local currency of a foreign market depreciates against the U.S. dollar, even
if the local currency value of the Fund's holdings goes up. The Fund intends to
hedge its non-U.S. dollar holdings.
HIGH YIELD SECURITIES RISK: High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is smaller and less liquid than that for investment
grade securities. High yield securities are generally not listed on a national
securities exchange but trade in the over-the-counter markets. Due to the
smaller, less liquid market for high yield securities, the bid-offer spread on
such securities is generally greater than it is for investment grade securities
and the purchase or sale of such securities may take longer to complete.
ILLIQUID SECURITIES RISK: Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
likely decline because the Fund holds floating rate debt that will adjust lower
with falling interest rates. For loans, interest rates typically reset
periodically.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities in the Fund will decline because of rising market interest rates.
Interest rate risk is generally lower for shorter-term investments and higher
for longer-term investments. Duration is a common measure of interest rate risk,
which measures a bond's expected life on a present value basis, taking into
account the bond's yield, interest payments and final maturity. Duration is a
reasonably accurate measure of a bond's price sensitivity to changes in interest
rates. The longer the duration of a bond, the greater the bond's price
sensitivity is to changes in interest rates.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders.
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Shares of the Fund could decline in value generally or could
underperform other investments.
NON-DIVERSIFICATION RISK: The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended. As a result, the Fund is only
limited as to the percentage of its assets that may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high
percentage of its assets in a limited number of issuers. As a result, the Fund
may be more susceptible to a single adverse economic or regulatory occurrence
affecting one or more of these issuers, experience increased volatility and be
highly concentrated in certain issuers.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
OTHER DEBT SECURITIES RISK: Secured loans that are not first lien, loans that
are unsecured and debt securities are subject to many of the same risks that
affect Senior Loans; however they are often unsecured and/or lower in the
issuer's capital structure than Senior Loans, and thus may be exposed to greater
risk of default and lower recoveries in the event of a default. This risk can be
further heightened in the case of below investment grade instruments.
Additionally, most fixed-income securities are fixed-rate and thus are generally
more susceptible than floating rate loans to price volatility related to changes
in prevailing interest rates.
PREPAYMENT RISK: Loans are subject to pre-payment risk. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among loan investors, among
others. As such, prepayments cannot be predicted with accuracy. Upon a
prepayment, either in part or in full, the actual outstanding debt on which the
Fund derives interest income will be reduced. The Fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid loan.
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund IV
(the "Trust"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Agreement") with First
Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First
Trust Senior Loan Fund (the "Fund"). The Board approved the continuation of the
Agreement for a one-year period ending June 30, 2017 at a meeting held on June
13, 2016. The Board determined that the continuation of the Agreement is in the
best interests of the Fund in light of the extent and quality of the services
provided and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Trustees that, among other things, outlined the services provided by the Advisor
to the Fund (including the relevant personnel responsible for these services and
their experience); the unitary fee rate payable by the Fund as compared to fees
charged to a peer group of funds which were also exchange-traded funds ("ETFs")
compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI
Peer Group"), and as compared to fees charged to other clients of the Advisor,
including other ETFs managed by the Advisor; expenses of the Fund as compared to
expense ratios of the funds in the MPI Peer Group; performance information for
the Fund; the nature of expenses incurred in providing services to the Fund and
the potential for economies of scale, if any; financial data on the Advisor; any
fall-out benefits to the Advisor and its affiliate, First Trust Portfolios L.P.
("FTP"); and information on the Advisor's compliance program. The Board reviewed
initial materials with the Advisor at a special meeting held on April 22, 2016,
prior to which the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor. Following the April meeting,
independent legal counsel on behalf of the Independent Trustees requested
certain clarifications and supplements to the materials provided, and the
information provided in response to those requests was considered at an
executive session of the Independent Trustees and independent legal counsel held
prior to the June 13, 2016 meeting, as well as at the meeting held that day. The
Board applied its business judgment to determine whether the arrangement between
the Trust and the Advisor continues to be a reasonable business arrangement from
the Fund's perspective as well as from the perspective of the Fund's
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreement, the Board had received sufficient
information to renew the Agreement. The Board considered that shareholders chose
to invest or remain invested in the Fund knowing that the Advisor manages the
Fund and knowing the Fund's unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality
of the services provided by the Advisor under the Agreement. The Board
considered that the Advisor is responsible for the overall management and
administration of the Trust and the Fund, and reviewed all of the services
provided by the Advisor to the Fund, as well as the background and experience of
the persons responsible for such services. The Board noted that the Fund is an
actively-managed ETF and noted that the Advisor's Leveraged Finance Investment
Team is responsible for the day-to-day management of the Fund's investments. The
Board considered the background and experience of the members of the Leveraged
Finance Investment Team. The Board considered the Advisor's statement that it
applies the same oversight model internally with its Leveraged Finance
Investment Team as it uses for overseeing external sub-advisors. In reviewing
the services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Adviser's and the Fund's compliance with the 1940 Act, as well as
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
the Fund's compliance with its investment objective and policies. In addition,
as part of the Board's consideration of the Advisor's services, the Advisor, in
its written materials and at the April 22, 2016 meeting, described to the Board
the scope of its ongoing investment in additional infrastructure and personnel
to maintain and improve the quality of services provided to the Fund and the
other funds in the First Trust Fund Complex. In light of the information
presented and the considerations made, the Board concluded that the nature,
extent and quality of the services provided to the Trust and the Fund by the
Advisor under the Agreement have been and are expected to remain satisfactory
and that the Advisor has managed the Fund consistent with the Fund's investment
objective and policies.
The Board considered the unitary fee rate payable by the Fund under the
Agreement for the services provided. The Board considered that as part of the
unitary fee the Advisor is responsible for the Fund's expenses, including the
cost of transfer agency, custody, fund administration, legal, audit and other
services and license fees (if any), but excluding interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if
any, and extraordinary expenses. The Board also received and reviewed
information showing the advisory or unitary fee rates and expense ratios of the
peer funds in the MPI Peer Group, as well as advisory fee rates charged by the
Advisor to other fund (including ETF) and non-fund clients. Because the Fund's
MPI Peer Group included peer funds that pay a unitary fee and because the Fund
pays a unitary fee, the Board determined that expense ratios were the most
relevant comparative data point. Based on the information provided, the Board
noted that the unitary fee for the Fund was above the median total (net) expense
ratio of the peer funds in the MPI Peer Group. With respect to the MPI Peer
Group, the Board discussed with representatives of the Advisor limitations in
creating peer groups for actively-managed ETFs and different business models
that may affect the pricing of services among ETF sponsors. The Board took these
limitations and differences into account in considering the peer data. With
respect to fees charged to other clients, the Board considered differences
between the Fund and other clients that limited their comparability. In
considering the unitary fee rate overall, the Board also considered the
Adviser's statement that it seeks to meet investor needs through innovative and
value-added investment solutions and the Advisor's description of its long-term
commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor for the Fund. The Board determined that this process continues to be
effective for reviewing the Fund's performance. The Board received and reviewed
information comparing the Fund's performance for the periods ended December 31,
2015 to the performance of the MPI Peer Group and to two benchmark indexes.
Based on the information provided, the Board noted that the Fund outperformed
the MPI Peer Group average and the benchmark indexes for the one-year period
ended December 31, 2015.
On the basis of all the information provided on the unitary fee and performance
of the Fund and the ongoing oversight by the Board, the Board concluded that the
unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the
Fund under the Agreement.
The Board considered information and discussed with the Adviser whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board noted that any reduction
in fixed costs associated with the management of the Fund would benefit the
Advisor, but that the unitary fee structure provides a level of certainty in
expenses for the Fund. The Board considered the revenues and allocated costs
(including the allocation methodology) of the Advisor in serving as investment
advisor to the Fund for the twelve months ended December 31, 2015 and the
estimated profitability level for the Fund calculated by the Advisor based on
such data, as well as complex-wide and product-line profitability data for the
same period. The Board noted the inherent limitations in the profitability
analysis, and concluded that, based on the information provided, the Advisor's
profitability level for the Fund was not unreasonable. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund. The Board considered that the Advisor had
identified as a fall-out benefit to the Advisor and FTP their exposure to
investors and brokers who, absent their exposure to the Fund, may have had no
dealings with the Advisor or FTP, and noted that the Advisor does not utilize
soft dollars in connection with its management of the Fund's portfolio.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Trust and the Fund. No single
factor was determinative in the Board's analysis.
Page 35
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
REMUNERATION
First Trust Advisors L.P. ("First Trust") is authorised and regulated by the
U.S. Securities and Exchange Commission and is entitled to market shares of the
First Trust Senior Loan Fund it manages (the "Fund") in the United Kingdom in
accordance with the cooperation arrangements in Article 42 of the Alternative
Investment Fund Managers Directive (the "Directive"). First Trust is required
under the Directive to make disclosures in respect of remuneration. The
following disclosures are made in line with First Trust's interpretation of
currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2015, the amount of remuneration paid (or to
be paid) by First Trust Advisors L.P. in respect of the Fund is $2,397,004. This
figure is comprised of $317,781 paid (or to be paid) in fixed compensation and
$2,079,223 paid (or to be paid) in variable compensation. There were a total of
13 beneficiaries of the remuneration described above. Those amounts include
$89,177 paid (or to be paid) to senior management of First Trust Advisors L.P.
and $2,307,827 paid (or to be paid) to other employees whose professional
activities have a material impact on the risk profiles of First Trust Advisors
L.P. or the Fund (collectively, "Code Staff").
Code Staff included in the aggregated figures disclosed above are rewarded in
line with First Trust's remuneration policy (the "Remuneration Policy") which is
determined and implemented by First Trust's senior management. The Remuneration
Policy reflects First Trust's ethos of good governance and encapsulates the
following principal objectives:
i. to provide a clear link between remuneration and performance of
First Trust and to avoid rewarding for failure;
ii. to promote sound and effective risk management consistent with the
risk profiles of the Funds managed by First Trust; and
iii. to remunerate staff in line with the business strategy, objectives,
values and interests of First Trust and the Funds managed by First
Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when
considering and implementing remuneration for Code Staff and considers whether
any potential award to such person(s) would give rise to a conflict of interest.
First Trust does not reward failure, or consider the taking of risk or failure
to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in
respect of performance-related remuneration of Code Staff by reference to a
broad range of measures including (i) individual performance (using financial
and non-financial criteria), and (ii) the overall performance of First Trust.
Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the
senior management sets fixed salaries at a level sufficient to ensure that
variable remuneration incentivises and rewards strong individual performance but
does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Page 36
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None
c/o First Trust Advisors L.P. Limited Partner Gundersen Real Estate
120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed
Suite 400 LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Inception Inc., ADM
Suite 400 Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 137 Director of Trust
c/o First Trust Advisors L.P. (Financial and Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Inception Harapan Educational Foundation (Educational Transport Inc.
Suite 400 Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 2014), Servant Interactive LLC (Educational
Products and Services); President and Chief
Executive Officer (June 2012 to September
2014), Dew Learning LLC (Educational
Products and Services); President (June
2002 to June 2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None
Chairman of the Board Advisors L.P. and First Trust
120 E. Liberty Drive, o Since Inception Portfolios L.P.; Chairman of the
Suite 400 Board of Directors, BondWave LLC
Wheaton, IL 60187 (Software Development Company)
D.O.B.: 09/55 and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 37
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust Advisors
D.O.B.: 01/66 L.P. and First Trust Portfolios L.P.; Chief Financial
Officer, BondWave LLC (Software Development
Company) (January 2016 to Present) and
Stonebridge Advisors LLC (Investment Advisor)
(January 2016 to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice
Wheaton, IL 60187 President (September 2006 to April 2012),
D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/
Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 o Since Inception Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to
120 E. Liberty Drive, Present), Vice President (August 2005 to
Suite 400 o Since Inception September 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 11/70
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 38
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining that relationship. We are committed to protecting the
security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 39
This page intentionally left blank.
FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Tactical High
Yield ETF (HYLS)
Annual Report
For the Year Ended
October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 5
Understanding Your Fund Expenses............................................. 8
Portfolio of Investments..................................................... 9
Statement of Assets and Liabilities.......................................... 24
Statement of Operations...................................................... 25
Statements of Changes in Net Assets.......................................... 26
Statement of Cash Flows...................................................... 27
Financial Highlights......................................................... 28
Notes to Financial Statements................................................ 29
Report of Independent Registered Public Accounting Firm...................... 36
Additional Information....................................................... 37
Board of Trustees and Officers............................................... 43
Privacy Policy............................................................... 45
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Tactical High Yield ETF; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of a relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Tactical High Yield ETF.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
The primary investment objective of the First Trust Tactical High Yield ETF (the
"Fund") is to provide current income. The Fund's secondary investment objective
is to provide capital appreciation. The Fund seeks to achieve its investment
objectives by investing at least 80% of its net assets (including investment
borrowings) in high yield debt securities that are, under normal market
conditions, rated below investment grade at the time of purchase or unrated
securities deemed by the Fund's advisor to be of comparable quality. Below
investment grade securities are those that, at the time of purchase, are rated
lower than "BBB-" by Standard & Poor's Ratings Group, a division of the McGraw
Hill Companies, Inc., or lower than "Baa3" by Moody's Investors Service, Inc.,
or comparably rated by another nationally recognized statistical rating
organization. High yield debt securities that are rated below investment grade
are commonly referred to as "junk" bonds. Such securities may include U.S. and
non-U.S. corporate debt obligations, bank loans and convertible bonds. For
purposes of determining whether a security is below investment grade, the lowest
available rating will be considered. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may not be appropriate for all
investors.
-------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (2/25/13) Inception (2/25/13)
10/31/16 to 10/31/16 to 10/31/16
FUND PERFORMANCE
NAV 4.89% 4.92% 19.33%
Market Price 4.50% 4.89% 19.19%
INDEX PERFORMANCE
BofA Merrill Lynch US High Yield
Constrained Index 10.18% 4.96% 19.50%
-------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Annual
Total Returns" represent the total change in value of an investment over the
period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of the shares of
the Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
-----------------------------------------------------------
% OF TOTAL LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS(1)
-----------------------------------------------------------
Health Care Providers & Services 15.2%
Media 12.9
Hotels, Restaurants & Leisure 11.4
Pharmaceuticals 7.7
Food Products 5.5
Diversified Telecommunication
Services 4.4
Software 4.0
Speciality Retail 3.9
Real Estate Management &
Development 3.1
Food & Staples Retailing 2.9
Containers & Packaging 2.4
Technology Hardware, Storage, &
Peripherals 2.3
Health Care Equipment & Supplies 1.9
Electric Utilities 1.9
Professional Services 1.9
Life Sciences Tools & Services 1.8
Diversified Consumer Services 1.8
Building Products 1.7
Wireless Telecommunication Services 1.6
Oil, Gas & Consumable Fuels 1.4
Semiconductors & Semiconductor
Equipment 1.4
Beverages 1.3
Commercial Services & Supplies 0.9
Trading Companies & Distributors 0.9
Insurance 0.8
Aerospace & Defense 0.8
Auto Components 0.6
Independent Power and Renewable
Electricity Producers 0.5
Automobiles 0.5
Internet Software & Services 0.4
Machinery 0.3
Equity Real Estate Investment Trusts
(REITs) 0.3
Diversified Financial Services 0.3
Industrial Conglomerates 0.3
Capital Markets 0.2
Household Products 0.2
Metals & Mining 0.2
Chemicals 0.2
Distributors 0.1
Road & Rail 0.1
Consumer Finance 0.0*
Construction Materials 0.0*
Internet & Direct Marketing Retail 0.0*
--------
Total 100.0%
========
* Amount is less than 0.1%.
-----------------------------------------------------------
% OF TOTAL LONG-TERM
ASSET CLASSIFICATION INVESTMENTS(1)
-----------------------------------------------------------
Corporate Bonds 49.1%
Senior Floating-Rate Loan Interests 36.2
Foreign Corporate Bonds 14.7
Rights 0.0*
--------
Total 100.0%
========
-----------------------------------------------------------
% OF TOTAL LONG-TERM
CREDIT QUALITY (S&P RATINGS)(2) INVESTMENTS(1)
-----------------------------------------------------------
BBB- 2.0%
BB+ 5.6
BB 9.5
BB- 15.0
B+ 19.8
B 16.8
B- 13.7
CCC+ 15.3
CCC 2.0
CCC- 0.1
CC 0.2
Not Rated 0.0*
--------
Total 100.0%
========
-----------------------------------------------------------
% OF TOTAL LONG-TERM
TOP 10 ISSUERS INVESTMENTS(1)
-----------------------------------------------------------
Tenet Healthcare Corp. 2.9%
Valeant Pharmaceuticals International,
Inc. 2.6
New HB Acquisition LLC 2.4
SFR Group SA 2.3
Select Medical Corp. 2.0
Caesars Growth Partners LLC 2.0
TEX Operations Co. LLC 1.9
Diamond 1 Finance Corp. 1.9
CHS/Community Health Systems, Inc. 1.8
Kindred Healthcare, Inc. 1.8
--------
Total 21.6%
========
(1) Percentages are based on the long positions only. Short positions are
excluded.
(2) The ratings are by Standard & Poor's Rating Group, a division of the
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO) of the
creditworthiness of an issuer with respect to debt obligations except for
those debt obligations that are only privately rated. Ratings are measured
on a scale that generally ranges from AAA (highest) to D (lowest).
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
Performance of a $10,000 Initial Investment
February 25, 2013 - October 31, 2016
First Trust Tactical BofA Merrill Lynch US High
High Yield ETF Yield Constrained Index
2/25/13 $10,000 $10,000
4/30/13 10,403 10,308
10/31/13 10,676 10,458
4/30/14 11,167 10,956
10/31/14 11,285 11,070
4/30/15 11,493 11,238
10/31/15 11,376 10,845
4/30/16 11,519 11,089
10/31/16 11,933 11,950
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period February 27, 2013
(commencement of trading) through October 31, 2016. 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. Data
presented represents past performance and cannot be used to predict future
results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
------------------------------------- -------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
2/27/13 - 10/31/13 94 37 0 0 37 5 0 0
11/1/13 - 10/31/14 158 29 0 0 63 2 0 0
11/1/14 - 10/31/15 177 8 2 0 60 4 0 0
11/1/15 - 10/31/16 201 7 0 0 42 2 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
INVESTMENT MANAGER
The First Trust Advisors L.P. ("First Trust" or the "Advisor") Leveraged Finance
Team is comprised of 14 experienced investment professionals specializing in
below investment grade securities. The team is comprised of portfolio
management, research, trading and operations personnel. As of October 31, 2016,
the First Trust Leveraged Finance Team managed or supervised approximately $2.55
billion in senior secured bank loans and high-yield bonds. These assets are
spread across various strategies, including a closed-end fund, an open-end fund,
four exchange-traded funds, one UCITs fund and a series of unit investment
trusts on behalf of retail and institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER,
LEVERAGED FINANCE TEAM
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER,
LEVERAGED FINANCE TEAM
ORLANDO PURPURA, CFA, CPA, CMT - SENIOR VICE PRESIDENT,
PORTFOLIO MANAGER, LEVERAGED FINANCE TEAM
COMMENTARY
The First Trust Tactical High Yield ETF is an actively managed exchange-traded
fund. The primary investment objective is to provide current income, with a
secondary objective of capital appreciation.
MARKET RECAP
The last 12 months were exceptionally strong for the high-yield bond and senior
loan market with trailing twelve month returns of 10.18% and 6.54% for the BofA
Merrill Lynch US High Yield Constrained Index and the S&P/LSTA Leveraged Loan
Index, respectively. In fact, high-yield bonds and senior loans outperformed
nearly every other major asset class over the prior year period. For context,
the total return of the S&P 500(R) Index over the period was only 4.51%. The
high-yield bond market is on pace to post its highest calendar year return since
emerging from the global financial crisis in 2009, in our view. We believe the
strong returns in the high-yield bond and senior loan markets are due to a
number of contributing factors. Accommodative central banks around the globe and
a rebound in commodity prices have been a catalyst for risk assets. In addition,
U.S. yields remain attractive relative to foreign yields, although yields in the
U.S. remain low by historical standards. As a result, the hunt for yield
continues to attract foreign investors to the U.S. Consider the fact that at the
end of October, the German Bund 10-year bond yield was 0.16% and the Japanese
10-year government bond yield was -0.05%. When compared to the 10-year U.S.
Treasury bond yield of 1.83%, we believe one can quickly discern why the foreign
investment into U.S. Treasury assets is continuing unabated.
High-Yield Bond Market
The BofA Merrill Lynch US High Yield Constrained Index returned 10.18% for the
12 month period. Additionally, the high-yield bond market ended the period with
nine consecutive months of positive returns.
Lower quality high-yield bonds outperformed higher quality high-yield bonds in
the period. Lower quality CCC rated issues returned 16.57%, significantly
outperforming the returns of higher quality B rated issues return of 6.98% and
BB rated issues return of 6.73% in the period. The average price of high-yield
bonds in the market entered the period at $94.19, fell to an average price of
$86.64 at the end of February in the wake of eroding commodity prices, and
recovered to end the period with an average price of $99.10 as commodity prices
rebounded.
Senior Loan Market
The S&P/LSTA Leveraged Loan Index returned 6.54% for the 12-month period.
Similar to the high-yield bond market, the senior loan market ended the period
with eight consecutive months of positive returns.
Lower quality senior loans outperformed higher quality senior loans in the
period. Lower quality CCC rated issues returned 14.48%, significantly
outperforming the returns of lower quality B rated issues return of 6.77% and BB
rated issues return of 5.16%. The average price of senior loans in the market
began the period at $93.68, dipped down to $89.44 at the end of February as
broader markets sold off, and rallied hard to end the period with an average
price of $97.17.
Page 5
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
Default Rates
During the period, default rates increased within both the JP Morgan High-Yield
Bond Universe and the S&P/LSTA Leveraged Loan Index. Default rates within the
high-yield bond market ended the period at 3.59% compared to the 2.21% default
rate one year ago. Default activity was driven higher by companies in the energy
and metals/mining industries as commodity prices were volatile during this time.
Excluding those industries, the trailing twelve month default rate was a mere
0.46%. A similar theme was experienced within the senior loan market, though far
less dramatic, as the senior loan market has lower exposure to those industries.
Senior loan LTM default rates ended the period at 1.95% compared to the 1.27%
default rate one year ago.
We believe that default rates may trend lower given the strength of corporate
balance sheets today, the lack of near-term debt maturities, access to robust
capital markets, and our view that the commodity sector has bottomed within the
senior loans and high-yield bond markets. Our prior view regarding default rates
within the high-yield bond and senior loan markets was correct, as corporate
defaults did in fact increase, but were contained within these cyclical
commodity sectors and not systemic to the overall market.
FUND PERFORMANCE
The Fund returned 4.89% on a net asset value ("NAV") basis and 4.50% on a market
price basis over the last 12 months, which underperformed the BofA Merrill Lynch
US High Yield Constrained Index (the "Index") return of 10.18% over the same
time period. As of October 31, 2016, the Fund had a four star overall
Morningstar rating among 656 funds in the High Yield Bond category (three
years).
The Fund's most recent monthly distribution of $0.205 per share was below the
$0.24 per share distribution paid in October 2015. At the end of the period, the
effective yield based on the distributions for the trailing 12 months was 5.49%.
As high-yield bond and senior loan prices have increased, their yields have
commensurately decreased. As a result, we believe this has been a primary driver
of the decreasing monthly distribution.
The Fund was generally overweight the lowest credit quality issues. At the end
of October 2015, the Fund held 20.27% in issues rated CCC+ or below compared to
14.06% for the Index. One year later, those weightings moved to 17.58% and
12.42% for the Fund and the Index, respectively. The Fund's performance did not
benefit from this overweight allocation to lower rated issues even though lower
rated issues outperformed higher rated issues in the period. This was primarily
because the Fund had a significant underweight allocation to the energy and
metals/mining industries. As of October 31, 2016, the energy and metals/mining
industries made up 18.80% of the Index, compared to only 1.62% for the Fund, and
posted a trailing 12-month return of 15.0%. The Fund had an overweight
allocation to the healthcare industry and specifically in the healthcare
facility and pharmaceutical segments. Healthcare as an industry typically lags
during a period of market tightening due to the defensive non-cyclical nature of
the industry, and this cycle was no different, as the healthcare high-yield bond
index returned 3.47% over the relevant measurement period. Within the healthcare
industry, the healthcare facilities segment (primarily acute care hospitals) has
experienced slowing admissions growth as the impact from the implementation of
the Affordable Care Act has stabilized. The segment spread remains tight to the
overall Index and healthcare spreads but has widened significantly from the
beginning of the period. In addition, the pharmaceutical segment faced headwinds
from various high profile Congressional hearings into drug pricing practices and
potential policy threats from the Presidential nominees to regulate drug pricing
which contributed to the lagging return relative to the Index. Additionally, the
Fund's above average allocation to cash was a headwind as the Fund grew its
assets by more than 106% from the prior year. Lastly, the Fund increased its
allocation to senior loans in order to shorten the overall portfolio duration
and reduce portfolio volatility. Given the short duration benefit of loans, as
well as some compelling relative value opportunities, the Fund increased its
allocation by nearly 900 basis point ("bps") to 36.25% of the maximum 40% bucket
for senior loans by the end of October 2016. This allocation to loans was a
headwind as senior loans underperformed high-yield bonds in the period.
The treasury short position has been a headwind to performance over the past
year as Treasury yields have generally declined. However, we continue to believe
that it will be a beneficial component of the Fund if interest rates begin to
rise towards the end of 2016 and beyond, as we see the Fed continuing its rate
hike, albeit at a moderate pace.
Page 6
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
MARKET AND FUND OUTLOOK
Looking ahead to 2017, we believe the market is not pricing in the potential for
higher inflation in the U.S. However, commodity inflation remains relatively
benign and, unless global central bank activity shifts to a tightening posture
(reduced quantitative easing), we believe that even improving wage inflation
will not cause the Fed to move towards a more aggressive pace of rate increases.
However, we will continue to monitor inflation closely due to the potential
impact on the yield curve, which has flattened significantly this year. In this
case, the flattening yield curve has been significantly influenced by the U.S.
Fed slowly increasing rates coupled with foreign demand for U.S. bonds tamping
down long-term interest rates, which may mitigate the typical concerns
associated with a flattening curve.
High-yield bond spreads over U.S. Treasuries are tight to historical norms at
T+491 basis points ("bps") as of October 31, 2016. The long-term average spread
over U.S. Treasuries is T+595 bps (December 1997 - October 2016). From the
recent spread highs of T+777 bps at January 31, 2016, high-yield spreads have
tightened significantly, and, as a result, valuations have normalized from the
significantly depressed levels early in the year. When considering the
high-yield bond spread relative to valuations within the senior loan market,
where the discounted spread to a three-year life was L+492 bps at the end of
October, we have viewed this relationship as an opportunity to reduce exposure
to high-yield bonds and migrate some exposure into secured, floating-rate senior
loans. High-yield bond spreads still remain wide of the tight spreads of T+245
bps in May 2007, and as such, we do continue to find value in certain parts of
the market.
After several years of senior loan outflows, retail investors have finally begun
to find favor in the senior loan asset class. According to JP Morgan, the senior
loan asset class ended the period with four consecutive monthly inflows totaling
$4.2 billion. The senior loan asset class has not experienced a string of
inflows like this since a stretch of 21 consecutive monthly inflows between July
2012 and March 2014. Flows out of the asset class for the year-to-date period
now sit at -$2.2 billion, compared to -$21.7 billion in 2015 and -$23.8 billion
in 2014. We believe there are several factors that are contributing to the
positive inflow trend. First, LIBOR has been increasing and has climbed from 61
bps to 88 bps year-to-date. For reference, LIBOR was a mere 33 bps one year ago.
We believe the increase in LIBOR has increased the attractiveness of senior
loans, especially when compared to longer duration, high interest rate risk
bonds. Moreover, we believe that with the potential for additional interest rate
hikes on the horizon, LIBOR should continue to migrate higher. Additionally,
current senior loan spreads compare favorably to the pre-credit crisis average
spread of L+372 (December 1997 - June 2007) and remain in-line with the
long-term average spread of L+526 (December 1997 - October 2016). We believe
senior loans, given their senior secured position in the capital structure,
floating interest rate, attractive income and low default rate are well
positioned as we move through the remainder of 2016 and into 2017.
We believe that in the near term, volatility may be elevated due to the
headwinds identified above but, at this point in the economic cycle, it will
likely be short lived. As a result, we believe near term volatility should
provide compelling opportunities in the U.S. high-yield bond and senior loan
markets and specifically within actively managed strategies where opportunities
can be taken advantage of and risk can be appropriately managed. We believe
credit selection will be paramount to driving strong returns over the remainder
of this economic cycle. In the early years of the economic recovery, returns
came relatively easily. We believe returns can still be healthy for this portion
of the cycle, however, they will be harder to come by, with greater volatility
in the markets. In a market where equity volatility is high, we believe
investors may benefit from moving up the corporate capital structure into
high-yield bonds and senior loans, where competitive yields and lower volatility
are typical. As we evaluate new investment opportunities, decisions will
continue to be rooted in our rigorous bottom-up credit analysis and focus on the
opportunities that we believe offer the best risk and reward balance. Despite
the many distractions that ebb and flow every quarter, we remain firmly focused
on finding value in the high-yield bond and senior loan markets.
Page 7
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust Tactical High Yield ETF (the "Fund"), you incur
two types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
--------------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO
BEGINNING ENDING BASED ON THE EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH DURING THE
MAY 1, 2016 OCTOBER 31, 2016 PERIOD SIX-MONTH PERIOD (a)
--------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
Actual $1,000.00 $1,035.90 1.07% $5.48
Hypothetical (5% return before expenses) $1,000.00 $1,019.76 1.07% $5.43
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (May 1,
2016 through October 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 8
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS -- 47.4%
AEROSPACE & DEFENSE -- 0.5%
$ 100,000 Orbital ATK, Inc................................................ 5.25% 10/01/21 $ 103,750
2,000,000 TransDigm, Inc.................................................. 6.00% 07/15/22 2,095,000
2,500,000 TransDigm, Inc.................................................. 6.50% 07/15/24 2,643,750
500,000 TransDigm, Inc. (a)............................................. 6.38% 06/15/26 513,800
---------------
5,356,300
---------------
ALTERNATIVE CARRIERS -- 1.0%
7,437,000 Level 3 Communications, Inc. (b)................................ 5.75% 12/01/22 7,678,703
500,000 Level 3 Financing, Inc.......................................... 5.38% 08/15/22 515,000
500,000 Level 3 Financing, Inc.......................................... 5.13% 05/01/23 506,250
2,000,000 Level 3 Financing, Inc.......................................... 5.38% 01/15/24 2,045,000
---------------
10,744,953
---------------
ALUMINUM -- 0.2%
1,850,000 Novelis Corp. (a)............................................... 5.88% 09/30/26 1,877,750
---------------
APPLICATION SOFTWARE -- 0.9%
400,000 ACI Worldwide, Inc. (a) (b)..................................... 6.38% 08/15/20 412,500
250,000 Infor US, Inc. (a).............................................. 5.75% 08/15/20 262,500
8,400,000 Infor US, Inc. (b).............................................. 6.50% 05/15/22 8,725,500
---------------
9,400,500
---------------
AUTO PARTS & EQUIPMENT -- 0.6%
425,000 American Axle & Manufacturing, Inc. (b)......................... 7.75% 11/15/19 482,375
1,000,000 American Axle & Manufacturing, Inc.............................. 6.63% 10/15/22 1,060,000
427,000 Cooper-Standard Automotive, Inc. (a)............................ 5.63% 11/15/26 430,203
250,000 Dana, Inc....................................................... 5.38% 09/15/21 260,156
4,035,000 MPG Holdco I, Inc............................................... 7.38% 10/15/22 4,130,832
---------------
6,363,566
---------------
AUTOMOTIVE RETAIL -- 0.2%
1,500,000 Asbury Automotive Group, Inc.................................... 6.00% 12/15/24 1,552,500
---------------
BROADCASTING -- 5.4%
13,350,000 Gray Television, Inc. (a)....................................... 5.88% 07/15/26 13,316,625
1,375,000 LIN Television Corp............................................. 5.88% 11/15/22 1,445,469
3,812,000 Nexstar Broadcasting, Inc. (b).................................. 6.88% 11/15/20 3,959,715
4,200,000 Nexstar Broadcasting, Inc. (a).................................. 6.13% 02/15/22 4,326,000
9,500,000 Nexstar Escrow Corp. (a)........................................ 5.63% 08/01/24 9,452,500
495,000 Sinclair Television Group, Inc.................................. 5.38% 04/01/21 512,325
2,500,000 Sinclair Television Group, Inc. (a)............................. 5.63% 08/01/24 2,537,500
1,690,000 Sinclair Television Group, Inc. (a)............................. 5.88% 03/15/26 1,749,150
850,000 Sinclair Television Group, Inc. (a)............................. 5.13% 02/15/27 816,000
4,000,000 Tribune Media Co................................................ 5.88% 07/15/22 4,020,000
11,152,000 Univision Communications, Inc. (a) (b).......................... 6.75% 09/15/22 11,793,797
2,000,000 Univision Communications, Inc. (a).............................. 5.13% 05/15/23 2,040,000
1,750,000 Univision Communications, Inc. (a).............................. 5.13% 02/15/25 1,760,937
---------------
57,730,018
---------------
BUILDING PRODUCTS -- 0.1%
500,000 Allegion US Holding Co., Inc. (b)............................... 5.75% 10/01/21 521,875
---------------
CABLE & SATELLITE -- 3.0%
6,000,000 Altice US Finance I Corp. (a)................................... 5.50% 05/15/26 6,135,000
7,500,000 CCO Holdings LLC / CCO Holdings Capital Corp. (b)............... 5.75% 01/15/24 7,949,999
6,700,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.88% 04/01/24 7,102,000
See Notes to Financial Statements Page 9
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
CABLE & SATELLITE (CONTINUED)
$ 1,000,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.75% 02/15/26 $ 1,044,375
1,500,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............... 5.50% 05/01/26 1,540,320
2,000,000 Cequel Communications Holdings I LLC / Cequel Capital
Corp. (a).................................................... 6.38% 09/15/20 2,067,500
2,000,000 Cequel Communications Holdings I LLC / Cequel Capital
Corp. (a) (b)................................................ 5.13% 12/15/21 1,980,000
3,500,000 Cequel Communications Holdings I LLC / Cequel Capital
Corp. (a).................................................... 7.75% 07/15/25 3,762,500
819,000 CSC Holdings LLC (a)............................................ 5.50% 04/15/27 832,821
100,000 Mediacom Broadband LLC / Mediacom Broadband Corp................ 5.50% 04/15/21 103,375
---------------
32,517,890
---------------
CASINOS & GAMING -- 2.7%
2,100,000 Boyd Gaming Corp. (a)........................................... 6.38% 04/01/26 2,257,500
6,650,000 Caesars Growth Properties Holdings LLC / Caesars Growth
Properties Finance, Inc...................................... 9.38% 05/01/22 7,098,875
150,000 GLP Capital LP / GLP Financing II, Inc.......................... 5.38% 04/15/26 159,750
250,000 Isle of Capri Casinos, Inc...................................... 5.88% 03/15/21 260,156
8,600,000 MGM Resorts International (b)................................... 7.75% 03/15/22 9,975,999
2,200,000 MGM Resorts International (b)................................... 6.00% 03/15/23 2,387,000
4,585,000 Station Casinos LLC (b)......................................... 7.50% 03/01/21 4,827,469
2,000,000 Wynn Las Vegas LLC / Wynn Las Vegas Capital Corp. (a)........... 5.50% 03/01/25 2,010,000
---------------
28,976,749
---------------
COMPUTER & ELECTRONICS RETAIL -- 0.3%
2,850,000 Energizer Holdings, Inc. (a).................................... 5.50% 06/15/25 2,892,750
---------------
CONSTRUCTION MATERIALS -- 0.0%
300,000 Summit Materials LLC / Summit Materials Finance Corp............ 6.13% 07/15/23 309,000
---------------
DISTRIBUTORS -- 0.1%
1,450,000 HD Supply, Inc. (a)............................................. 5.75% 04/15/24 1,526,125
---------------
DIVERSIFIED REAL ESTATE ACTIVITIES -- 2.3%
3,000,000 CalAtlantic Group, Inc.......................................... 5.25% 06/01/26 2,977,500
5,810,000 KB Home (b)..................................................... 7.00% 12/15/21 6,260,275
500,000 KB Home......................................................... 7.63% 05/15/23 535,000
1,000,000 Meritage Homes Corp............................................. 7.00% 04/01/22 1,121,000
1,872,000 PulteGroup, Inc................................................. 5.50% 03/01/26 1,956,240
3,000,000 Taylor Morrison Communities Inc. / Monarch Communities,
Inc. (a)..................................................... 5.88% 04/15/23 3,180,000
1,275,000 Taylor Morrison Communities, Inc. / Monarch Communities,
Inc. (a) (b)................................................. 5.25% 04/15/21 1,313,250
7,039,000 TRI Pointe Holdings, Inc./TRI Pointe Homes, Inc................. 5.88% 06/15/24 7,329,358
---------------
24,672,623
---------------
FERTILIZERS & AGRICULTURAL CHEMICALS -- 0.0%
100,000 Scotts Miracle-Gro (The) Co. (a)................................ 6.00% 10/15/23 106,500
---------------
FINANCIAL EXCHANGES & DATA -- 0.1%
1,146,000 MSCI, Inc. (a).................................................. 5.75% 08/15/25 1,224,100
---------------
FOOD RETAIL -- 0.1%
935,000 Albertsons Cos. LLC / Safeway, Inc. / New Albertson's, Inc. /
Albertson's LLC (a).......................................... 5.75% 03/15/25 925,360
---------------
Page 10 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
HEALTH CARE EQUIPMENT -- 1.3%
$ 1,500,000 Alere, Inc...................................................... 7.25% 07/01/18 $ 1,527,188
3,834,000 Alere, Inc. (b)................................................. 6.50% 06/15/20 3,902,666
1,750,000 Alere, Inc. (a)................................................. 6.38% 07/01/23 1,811,250
6,950,000 DJO Finco, Inc. / DJO Finance LLC / DJO Finance
Corp. (a) (b)................................................ 8.13% 06/15/21 6,411,375
700,000 Hill-Rom Holdings, Inc. (a)..................................... 5.75% 09/01/23 738,500
---------------
14,390,979
---------------
HEALTH CARE FACILITIES -- 8.9%
250,000 Acadia Healthcare Co., Inc...................................... 6.50% 03/01/24 255,625
12,975,000 CHS/Community Health Systems, Inc............................... 8.00% 11/15/19 11,482,875
10,000,000 CHS/Community Health Systems, Inc. (b).......................... 6.88% 02/01/22 7,675,000
1,000,000 HCA, Inc........................................................ 7.50% 02/15/22 1,140,500
3,000,000 HCA, Inc........................................................ 5.88% 05/01/23 3,190,320
6,519,000 HCA, Inc. (b)................................................... 5.38% 02/01/25 6,662,092
250,000 HealthSouth Corp................................................ 5.13% 03/15/23 253,750
5,800,000 HealthSouth Corp................................................ 5.75% 11/01/24 6,010,250
250,000 HealthSouth Corp................................................ 5.75% 09/15/25 260,000
12,750,000 Kindred Healthcare, Inc......................................... 8.00% 01/15/20 12,686,250
2,500,000 Kindred Healthcare, Inc. (b).................................... 6.38% 04/15/22 2,323,450
500,000 LifePoint Health, Inc........................................... 5.50% 12/01/21 518,438
1,000,000 LifePoint Health, Inc. (a)...................................... 5.38% 05/01/24 996,300
10,500,000 Select Medical Corp. (b)........................................ 6.38% 06/01/21 10,421,250
3,005,000 Tenet Healthcare Corp........................................... 5.00% 03/01/19 2,928,943
1,000,000 Tenet Healthcare Corp........................................... 5.50% 03/01/19 982,500
1,000,000 Tenet Healthcare Corp........................................... 8.00% 08/01/20 992,500
26,000,000 Tenet Healthcare Corp. (b)...................................... 8.13% 04/01/22 25,544,999
1,000,000 Universal Health Services, Inc. (a)............................. 5.00% 06/01/26 1,040,000
---------------
95,365,042
---------------
HEALTH CARE SERVICES -- 0.9%
2,700,000 Amsurg Corp. (b)................................................ 5.63% 07/15/22 2,764,125
1,000,000 DaVita, Inc..................................................... 5.00% 05/01/25 967,500
3,000,000 Envision Healthcare Corp. (a)................................... 5.13% 07/01/22 3,015,000
3,040,000 Surgical Care Affiliates, Inc. (a).............................. 6.00% 04/01/23 3,176,800
---------------
9,923,425
---------------
HOMEFURNISHING RETAIL -- 1.9%
16,580,000 Serta Simmons Bedding LLC (a) (b)............................... 8.13% 10/01/20 17,233,666
100,000 Tempur Sealy International, Inc................................. 5.63% 10/15/23 104,000
3,450,000 Tempur Sealy International, Inc................................. 5.50% 06/15/26 3,562,125
---------------
20,899,791
---------------
HOTELS, RESORTS & CRUISE LINES -- 0.6%
3,600,000 ESH Hospitality, Inc. (a)....................................... 5.25% 05/01/25 3,573,000
1,000,000 FelCor Lodging LP............................................... 5.63% 03/01/23 1,036,990
2,100,000 FelCor Lodging LP............................................... 6.00% 06/01/25 2,189,250
---------------
6,799,240
---------------
HOUSEHOLD PRODUCTS -- 0.2%
2,000,000 Spectrum Brands, Inc............................................ 6.13% 12/15/24 2,200,000
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS -- 0.5%
500,000 Calpine Corp.................................................... 5.50% 02/01/24 490,000
1,592,000 NRG Energy, Inc. (b)............................................ 7.88% 05/15/21 1,671,600
See Notes to Financial Statements Page 11
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (CONTINUED)
$ 3,500,000 NRG Energy, Inc................................................. 6.25% 07/15/22 $ 3,526,250
---------------
5,687,850
---------------
INDUSTRIAL MACHINERY -- 0.2%
858,000 SPX Flow, Inc. (a).............................................. 5.63% 08/15/24 871,943
858,000 SPX Flow, Inc. (a).............................................. 5.88% 08/15/26 873,015
---------------
1,744,958
---------------
INSURANCE BROKERS -- 0.4%
1,000,000 HUB International Ltd. (a)...................................... 7.88% 10/01/21 1,024,700
3,460,000 USI, Inc. (a)................................................... 7.75% 01/15/21 3,511,900
---------------
4,536,600
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.9%
4,000,000 Frontier Communications Corp.................................... 7.13% 03/15/19 4,300,000
2,375,000 Frontier Communications Corp.................................... 8.88% 09/15/20 2,532,344
280,000 Frontier Communications Corp.................................... 6.25% 09/15/21 267,400
3,075,000 Frontier Communications Corp. (b)............................... 8.75% 04/15/22 3,051,938
---------------
10,151,682
---------------
INTERNET & DIRECT MARKETING RETAIL -- 0.0%
250,000 Netflix, Inc.................................................... 5.88% 02/15/25 277,813
---------------
LEISURE FACILITIES -- 0.1%
650,000 ClubCorp Club Operations, Inc. (a).............................. 8.25% 12/15/23 695,500
775,000 Six Flags Entertainment Corp. (a)............................... 5.25% 01/15/21 798,444
---------------
1,493,944
---------------
LIFE SCIENCES TOOLS & SERVICES -- 1.0%
1,163,000 inVentiv Group Holdings, Inc. / inVentiv Health, Inc. / inVentiv
Health Clinical, Inc. (a).................................... 7.50% 10/01/24 1,200,798
2,000,000 inVentiv Health, Inc. (a)....................................... 9.00% 01/15/18 2,028,750
3,100,000 Jaguar Holding Co. II / Pharmaceutical Product Development
LLC (a)...................................................... 6.38% 08/01/23 3,124,800
4,750,000 Ortho-Clinical Diagnostics, Inc. / Ortho-Clinical Diagnostics
SA (a) (b)................................................... 6.63% 05/15/22 4,085,000
---------------
10,439,348
---------------
MANAGED HEALTH CARE -- 1.1%
2,250,000 Centene Corp.................................................... 6.13% 02/15/24 2,401,875
9,250,000 MPH Acquisition Holdings LLC (a)................................ 7.13% 06/01/24 9,919,700
---------------
12,321,575
---------------
METAL & GLASS CONTAINERS -- 0.1%
795,000 Owens-Brockway Glass Container, Inc. (a)........................ 5.88% 08/15/23 848,663
---------------
MOVIES & ENTERTAINMENT -- 0.9%
339,000 AMC Entertainment Holdings, Inc. (a)............................ 5.88% 11/15/26 341,119
3,000,000 AMC Entertainment, Inc.......................................... 5.88% 02/15/22 3,131,250
2,400,000 AMC Entertainment, Inc.......................................... 5.75% 06/15/25 2,418,000
1,625,000 Cinemark USA, Inc. (b).......................................... 4.88% 06/01/23 1,635,156
500,000 Live Nation Entertainment, Inc. (a)............................. 7.00% 09/01/20 519,199
1,100,000 Live Nation Entertainment, Inc. (a) (b)......................... 5.38% 06/15/22 1,144,000
500,000 Regal Entertainment Group....................................... 5.75% 03/15/22 518,750
---------------
9,707,474
---------------
Page 12 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
OIL & GAS EXPLORATION & PRODUCTION -- 0.5%
$ 1,700,000 Murphy Oil Corp................................................. 6.88% 08/15/24 $ 1,795,560
1,000,000 Rice Energy, Inc................................................ 7.25% 05/01/23 1,065,000
2,250,000 Sanchez Energy Corp............................................. 7.75% 06/15/21 2,103,750
125,000 Sanchez Energy Corp............................................. 6.13% 01/15/23 107,500
766,000 Tallgrass Energy Partners LP / Tallgrass Energy Finance
Corp. (a).................................................... 5.50% 09/15/24 764,085
---------------
5,835,895
---------------
OIL & GAS REFINING & MARKETING -- 0.0%
250,000 CITGO Petroleum Corp. (a)....................................... 6.25% 08/15/22 256,875
---------------
OIL & GAS STORAGE & TRANSPORTATION -- 0.7%
1,885,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp................................................. 6.00% 12/15/20 1,925,056
2,875,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp. (b)............................................ 6.13% 03/01/22 2,954,063
100,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp................................................. 6.25% 04/01/23 101,750
1,750,000 Holly Energy Partners LP / Holly Energy Finance Corp. (b)....... 6.50% 03/01/20 1,806,875
625,000 Holly Energy Partners LP / Holly Energy Finance Corp. (a)....... 6.00% 08/01/24 653,125
312,000 Summit Midstream Holdings LLC / Summit Midstream
Finance Corp................................................. 5.50% 08/15/22 304,200
196,000 Tesoro Logistics LP / Tesoro Logistics Finance Corp............. 5.88% 10/01/20 201,145
---------------
7,946,214
---------------
PACKAGED FOODS & MEATS -- 1.1%
1,600,000 Pilgrim's Pride Corp. (a)....................................... 5.75% 03/15/25 1,644,000
3,125,000 Post Holdings, Inc. (a)......................................... 6.75% 12/01/21 3,351,562
800,000 Post Holdings, Inc. (a)......................................... 6.00% 12/15/22 847,000
1,250,000 Post Holdings, Inc. (a)......................................... 7.75% 03/15/24 1,387,750
1,708,000 Post Holdings, Inc. (a)......................................... 8.00% 07/15/25 1,955,660
1,650,000 Post Holdings, Inc. (a)......................................... 5.00% 08/15/26 1,604,625
1,000,000 TreeHouse Foods, Inc. (a)....................................... 6.00% 02/15/24 1,079,000
---------------
11,869,597
---------------
PAPER PACKAGING -- 0.8%
7,552,000 Reynolds Group Issuer, Inc. / Reynolds Group Issuer LLC /
Reynolds Group Issuer Lu (a)................................. 7.00% 07/15/24 8,085,360
---------------
PHARMACEUTICALS -- 0.9%
5,200,000 Endo Finance LLC (a)............................................ 5.75% 01/15/22 4,706,000
2,000,000 Endo Finance LLC / Endo Finco, Inc. (a) (b)..................... 7.25% 01/15/22 1,905,000
2,000,000 Endo Finance LLC / Endo Finco, Inc. (a)......................... 5.38% 01/15/23 1,710,000
800,000 Quintiles IMS, Inc. (a)......................................... 5.00% 10/15/26 829,000
---------------
9,150,000
---------------
RESEARCH & CONSULTING SERVICES -- 0.1%
625,000 Nielsen Finance LLC / Nielsen Finance Co. (a)................... 5.00% 04/15/22 639,844
---------------
RESTAURANTS -- 0.5%
661,000 Brinker International, Inc. (a)................................. 5.00% 10/01/24 674,220
4,949,000 Landry's, Inc. (a).............................................. 6.75% 10/15/24 5,060,353
---------------
5,734,573
---------------
SEMICONDUCTORS -- 0.5%
1,350,000 Micron Technology, Inc. (a)..................................... 7.50% 09/15/23 1,493,438
3,450,000 Western Digital Corp. (a)....................................... 7.38% 04/01/23 3,782,063
---------------
5,275,501
---------------
See Notes to Financial Statements Page 13
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
SPECIALIZED CONSUMER SERVICES -- 0.2%
$ 2,000,000 Aramark Services, Inc. (a)...................................... 4.75% 06/01/26 $ 2,005,000
---------------
SPECIALIZED REITS (REAL ESTATE INVESTMENT TRUSTS) -- 0.1%
400,000 GEO Group (The), Inc............................................ 5.88% 01/15/22 379,000
750,000 GEO Group (The), Inc............................................ 5.88% 10/15/24 654,375
---------------
1,033,375
---------------
SPECIALTY CHEMICALS -- 0.1%
300,000 OMNOVA Solutions, Inc........................................... 7.88% 11/01/18 300,000
900,000 Valvoline, Inc. (a)............................................. 5.50% 07/15/24 951,750
---------------
1,251,750
---------------
SPECIALTY STORES -- 0.7%
7,575,000 PetSmart, Inc. (a) (b).......................................... 7.13% 03/15/23 7,944,281
---------------
SYSTEMS SOFTWARE -- 0.4%
975,000 BMC Software Finance, Inc. (a) (b).............................. 8.13% 07/15/21 897,000
2,928,000 BMC Software, Inc............................................... 7.25% 06/01/18 2,928,000
---------------
3,825,000
---------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS -- 1.8%
1,850,000 Diamond 1 Finance Corp. / Diamond 2 Finance Corp. (a)........... 5.88% 06/15/21 1,950,572
12,850,000 Diamond 1 Finance Corp. / Diamond 2 Finance Corp. (a)........... 7.13% 06/15/24 14,087,840
3,000,000 Diamond 1 Finance Corp. / Diamond 2 Finance Corp. (a)........... 6.02% 06/15/26 3,276,077
---------------
19,314,489
---------------
TRADING COMPANIES & DISTRIBUTORS -- 0.9%
1,500,000 Ashtead Capital, Inc. (a) (b)................................... 6.50% 07/15/22 1,580,625
1,078,000 BlueLine Rental Finance Corp. (a)............................... 7.00% 02/01/19 945,945
850,000 United Rentals North America, Inc. (b).......................... 7.63% 04/15/22 908,123
5,000,000 United Rentals North America, Inc............................... 5.75% 11/15/24 5,212,500
250,000 United Rentals North America, Inc............................... 5.50% 07/15/25 254,063
339,000 United Rentals North America, Inc............................... 5.50% 05/15/27 337,729
---------------
9,238,985
---------------
TRUCKING -- 0.1%
300,000 Avis Budget Car Rental LLC / Avis Budget Finance, Inc. (a)...... 5.13% 06/01/22 295,125
875,000 Avis Budget Car Rental LLC / Avis Budget Finance, Inc. (b)...... 5.50% 04/01/23 869,531
250,000 Hertz (The) Corp................................................ 7.38% 01/15/21 258,125
100,000 Hertz (The) Corp. (a)........................................... 5.50% 10/15/24 97,340
---------------
1,520,121
---------------
WIRELESS TELECOMMUNICATION SERVICES -- 1.5%
1,680,000 SBA Communications Corp. (a).................................... 4.88% 09/01/24 1,684,200
4,000,000 Sprint Capital Corp............................................. 6.90% 05/01/19 4,220,000
2,750,000 Sprint Communications, Inc. (a)................................. 9.00% 11/15/18 3,031,875
2,250,000 Sprint Communications, Inc. (b)................................. 7.00% 08/15/20 2,345,625
150,000 T-Mobile USA, Inc............................................... 6.00% 03/01/23 158,250
2,500,000 T-Mobile USA, Inc............................................... 6.63% 04/01/23 2,662,950
2,000,000 T-Mobile USA, Inc............................................... 6.84% 04/28/23 2,141,000
---------------
16,243,900
---------------
TOTAL CORPORATE BONDS....................................................................... 510,657,703
(Cost $506,647,483) ---------------
Page 14 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
FOREIGN CORPORATE BONDS -- 14.1%
AEROSPACE & DEFENSE -- 0.2%
$ 2,000,000 Bombardier, Inc. (a)............................................ 7.75% 03/15/20 $ 2,040,000
---------------
ALTERNATIVE CARRIERS -- 0.2%
1,200,000 Intelsat Luxembourg SA.......................................... 6.75% 06/01/18 828,000
2,650,000 Intelsat Luxembourg SA (b)...................................... 7.75% 06/01/21 874,500
---------------
1,702,500
---------------
ALUMINUM -- 0.0%
250,000 Alcoa Nederland Holding BV (a).................................. 7.00% 09/30/26 258,075
---------------
AUTOMOBILE MANUFACTURERS -- 0.4%
4,000,000 Fiat Chrysler Automobiles NV.................................... 5.25% 04/15/23 4,095,000
---------------
BUILDING PRODUCTS -- 1.6%
250,000 Allegion PLC.................................................... 5.88% 09/15/23 270,625
6,880,000 Cemex SAB de C.V. (a)........................................... 7.25% 01/15/21 7,411,136
7,000,000 Cemex SAB de C.V. (a)........................................... 7.75% 04/16/26 7,861,700
1,100,000 Masonite International Corp. (a)................................ 5.63% 03/15/23 1,144,000
---------------
16,687,461
---------------
CABLE & SATELLITE -- 2.0%
2,000,000 Virgin Media Finance PLC (a).................................... 6.38% 04/15/23 2,050,000
2,480,000 Virgin Media Finance PLC (a).................................... 6.00% 10/15/24 2,526,500
1,654,000 Virgin Media Finance PLC (a).................................... 5.75% 01/15/25 1,643,663
3,073,000 Virgin Media Secured Finance PLC (a)............................ 5.50% 08/15/26 3,107,571
5,074,000 Ziggo Bond Finance BV (a)....................................... 6.00% 01/15/27 4,994,719
7,750,000 Ziggo Secured Finance BV (a).................................... 5.50% 01/15/27 7,672,500
---------------
21,994,953
---------------
CASINOS & GAMING -- 1.2%
250,000 International Game Technology PLC (a)........................... 5.63% 02/15/20 265,938
3,329,000 International Game Technology PLC (a)........................... 6.25% 02/15/22 3,545,385
6,000,000 MCE Finance Ltd. (a)............................................ 5.00% 02/15/21 6,022,043
3,240,000 Wynn Macau Ltd. (a)............................................. 5.25% 10/15/21 3,267,508
---------------
13,100,874
---------------
CONSTRUCTION MACHINERY & HEAVY TRUCKS -- 0.2%
1,700,000 CNH Industrial NV............................................... 4.50% 08/15/23 1,712,750
---------------
DIVERSIFIED CHEMICALS -- 0.0%
250,000 INEOS Group Holdings SA (a)..................................... 5.88% 02/15/19 255,625
---------------
HEALTH CARE SUPPLIES -- 0.0%
400,000 ConvaTec Healthcare E SA (a) (b)................................ 10.50% 12/15/18 404,500
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 2.2%
22,750,000 SFR Group SA (a) (b)............................................ 6.00% 05/15/22 23,411,342
---------------
INTERNET SOFTWARE & SERVICES -- 0.3%
2,507,000 Open Text Corp. (a)............................................. 5.63% 01/15/23 2,608,834
1,000,000 Open Text Corp. (a)............................................. 5.88% 06/01/26 1,067,500
---------------
3,676,334
---------------
METAL & GLASS CONTAINERS -- 1.1%
1,188,177 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (a) (b)................................................. 7.00% 11/15/20 1,229,763
6,250,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (a)..................................................... 6.75% 01/31/21 6,468,750
See Notes to Financial Statements Page 15
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
FOREIGN CORPORATE BONDS (CONTINUED)
METAL & GLASS CONTAINERS (CONTINUED)
$ 4,300,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (a)..................................................... 7.25% 05/15/24 $ 4,558,000
---------------
12,256,513
---------------
PACKAGED FOODS & MEATS -- 0.8%
1,250,000 FAGE International SA/ FAGE USA Dairy Industry, Inc. (a)........ 5.63% 08/15/26 1,293,750
2,650,000 JBS USA LUX SA / JBS USA Finance, Inc. (a)...................... 7.25% 06/01/21 2,729,500
4,831,000 JBS USA LUX SA / JBS USA Finance, Inc. (a) (b).................. 5.88% 07/15/24 4,879,310
---------------
8,902,560
---------------
PAPER PACKAGING -- 0.1%
1,000,000 Cascades, Inc. (a).............................................. 5.50% 07/15/22 1,025,630
---------------
PHARMACEUTICALS -- 3.1%
4,084,000 Capsugel SA (a) (b) (c)......................................... 7.00% 05/15/19 4,086,042
970,000 Concordia International Corp. (a)............................... 9.00% 04/01/22 949,388
5,080,000 Endo Ltd. / Endo Finance LLC / Endo Finco, Inc. (a)............. 6.00% 07/15/23 4,445,000
3,585,000 Endo Ltd. / Endo Finance LLC / Endo Finco, Inc. (a)............. 6.00% 02/01/25 3,038,288
500,000 Grifols Worldwide Operations Ltd................................ 5.25% 04/01/22 523,750
4,000,000 Mallinckrodt International Finance SA/Mallinckrodt CB
LLC (a)...................................................... 5.75% 08/01/22 3,810,000
1,000,000 Mallinckrodt International Finance SA/Mallinckrodt CB
LLC (a)...................................................... 5.63% 10/15/23 945,000
1,750,000 Mallinckrodt International Finance SA/Mallinckrodt CB
LLC (a)...................................................... 5.50% 04/15/25 1,627,500
11,500,000 Valeant Pharmaceuticals International, Inc. (a)................. 6.75% 08/15/18 11,281,499
2,040,000 Valeant Pharmaceuticals International, Inc. (a)................. 5.38% 03/15/20 1,774,800
1,000,000 Valeant Pharmaceuticals International, Inc. (a)................. 7.50% 07/15/21 893,750
---------------
33,375,017
---------------
RESEARCH & CONSULTING SERVICES -- 0.1%
825,000 Nielsen Co. Luxembourg S.A.R.L. (The) (a)....................... 5.50% 10/01/21 861,094
---------------
RESTAURANTS -- 0.3%
3,000,000 1011778 B.C. ULC / New Red Finance, Inc. (a) (b)................ 6.00% 04/01/22 3,142,500
---------------
SECURITY & ALARM SERVICES -- 0.3%
1,000,000 Garda World Security Corp. (a).................................. 7.25% 11/15/21 960,000
2,500,000 Garda World Security Corp. (a) (b).............................. 7.25% 11/15/21 2,400,000
---------------
3,360,000
---------------
TOTAL FOREIGN CORPORATE BONDS............................................................... 152,262,728
(Cost $153,328,338) ---------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (d) MATURITY (e) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS -- 35.0%
AEROSPACE & DEFENSE -- 0.1%
981,433 TransDigm, Inc., Term Loan F - Extended......................... 3.75% 06/09/23 977,145
---------------
APPAREL RETAIL -- 0.1%
1,383,721 Neiman Marcus Group (The), Inc., Other Term Loan................ 4.25% 10/25/20 1,271,294
---------------
APPLICATION SOFTWARE -- 0.9%
2,735,931 Epicor Software Corp., Term B Loan.............................. 4.75% 06/01/22 2,702,580
917,878 Infor (US), Inc., Tranche B-5 Term Loan......................... 3.75% 06/03/20 914,932
406,154 Informatica Corp. (Ithacalux S.A.R.L.), Dollar Term Loan........ 4.50% 08/05/22 398,465
Page 16 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (d) MATURITY (e) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
APPLICATION SOFTWARE (CONTINUED)
$ 468,687 JDA Software Group (RP Crown Parent, Inc.), Term Loan B......... 4.50% 09/21/23 $ 468,354
5,232,000 Kronos, Inc., 1st Lien Term Loan................................ 5.00% 11/01/23 5,252,823
263,196 Triple Point Technologies, Inc., Term Loan...................... 5.25% 07/10/20 234,903
---------------
9,972,057
---------------
ASSET MANAGEMENT & CUSTODY BANKS -- 0.1%
1,183,562 Victory Capital Holdings (VCH Holdings LLC), Initial
Term Loan.................................................... 8.50% 10/29/21 1,168,471
---------------
BROADCASTING -- 0.4%
42,545 Nexstar Broadcasting, Inc., Mission Term Loan................... 3.88% 10/31/23 42,705
477,455 Nexstar Broadcasting, Inc., Nexstar Term Loan................... 3.88% 10/31/23 479,245
3,302,897 Tribune Media Co., Term B Loan.................................. 3.75% 12/27/20 3,318,585
---------------
3,840,535
---------------
BUILDING PRODUCTS -- 0.0%
486,891 Jeld-Wen, Inc., Term Loan B..................................... 4.75% 07/01/22 489,730
---------------
CABLE & SATELLITE -- 0.4%
4,605,263 Cablevision Systems Corp. (CSC Holdings, Inc.),
Term Loan B.................................................. 3.75% 10/11/24 4,619,641
---------------
CASINOS & GAMING -- 4.1%
3,118,500 Amaya Holdings B.V., 2nd Lien Term Loan......................... 8.00% 07/31/22 3,102,908
14,440,264 Amaya Holdings B.V., Initial Term B Loan (First Lien)........... 5.00% 08/01/21 14,419,904
4,250,000 Caesars Entertainment Resort Properties LLC, Term B Loan........ 7.00% 10/11/20 4,271,250
13,595,045 Caesars Growth Partners LLC, Term B Loan (First Lien)........... 6.25% 05/08/21 13,572,341
8,643,993 CityCenter Holdings LLC, Term B Loan............................ 4.25% 10/16/20 8,689,028
---------------
44,055,431
---------------
CONSUMER FINANCE -- 0.0%
490,224 Walter Investment Management Corp., Tranche B Term Loan......... 4.75% 12/18/20 458,360
---------------
DIVERSIFIED SUPPORT SERVICES -- 0.6%
6,016,667 Brickman Group Holdings, Inc., Second Lien Term Loan............ 7.50% 12/18/21 5,995,969
---------------
ELECTRIC UTILITIES -- 1.8%
379,747 Energy Future Intermediate Holding Co., DIP Term Loan........... 4.25% 06/30/17 381,725
15,767,014 TEX Operations Co. LLC, Exit Term Loan B (f).................... 5.00% 08/04/23 15,904,976
3,595,986 TEX Operations Co. LLC, Exit Term Loan C (f).................... 5.00% 08/04/23 3,627,451
---------------
19,914,152
---------------
ENVIRONMENTAL & FACILITIES SERVICES -- 0.0%
147,375 PSSI (Packers Holdings LLC), Term Loan.......................... 4.75% 12/02/21 147,743
---------------
FOOD RETAIL -- 1.2%
9,844,559 Albertsons LLC, New Term Loan B4................................ 4.50% 08/25/21 9,914,259
997,500 Albertsons LLC, New Term Loan B5................................ 4.75% 12/21/22 1,007,365
2,331,856 Albertsons LLC, Term Loan B6.................................... 4.75% 06/22/23 2,356,154
---------------
13,277,778
---------------
HEALTH CARE EQUIPMENT -- 0.5%
1,994,949 DJO Finance LLC (ReAble Therapeutics Finance LLC), Initial
Term Loan.................................................... 4.25% 06/08/20 1,972,506
2,997,494 Kinetic Concepts, Inc., Term Loan F............................. 5.00% 11/01/20 3,018,116
---------------
4,990,622
---------------
See Notes to Financial Statements Page 17
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (d) MATURITY (e) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HEALTH CARE FACILITIES -- 1.5%
$ 271,034 Acadia Healthcare Co., Inc., Term Loan B1....................... 3.75% 02/11/22 $ 271,034
992,500 Acadia Healthcare Co., Inc., Term Loan B2....................... 3.75% 02/15/23 995,398
3,949,749 Kindred Healthcare, Inc., New Term Loan......................... 4.25% 04/09/21 3,946,471
2,000,000 Select Medical Corp., Series E Tranche B Term Loan.............. 6.00% 06/01/18 2,003,760
8,808,945 Select Medical Corp., Term Loan F............................... 6.00% - 7.50% 02/28/21 8,845,679
---------------
16,062,342
---------------
HEALTH CARE SERVICES -- 2.2%
787,355 21st Century Oncology, Inc., Tranche B Term Loan................ 7.13% 04/30/22 724,367
1,239,362 Air Medical Group Holdings, Inc., Initial Term Loan............. 4.25% 04/28/22 1,227,750
598,500 Air Medical Group Holdings, Inc., 2016 New Term Loan............ 5.00% 04/28/22 602,989
98,958 AMAG Pharmaceuticals, Inc., Initial Term Loan................... 4.75% 08/17/21 98,958
1,983,713 CareCore National LLC, Term Loan................................ 5.50% 03/05/21 1,948,998
696,500 CHG Healthcare Services, Inc., Term Loan B...................... 4.75% 06/07/23 701,550
2,955,000 Curo Health Services Holdings, Inc., Term B Loan
(First Lien)................................................. 6.50% 02/07/22 2,961,145
992,500 Envision Healthcare Corp. (Emergency Medical Services Corp.),
Tranche B-2 Term Loan........................................ 4.50% 10/28/22 995,607
200,000 ExamWorks Group, Inc., Term Loan B.............................. 4.75% 07/27/23 201,166
3,496,562 Healogics, Inc. (CDRH Parent, Inc.), Initial Term Loan
(First Lien)................................................. 5.25% 07/01/21 2,744,801
3,254,696 Surgery Centers Holdings, Inc., Term Loan B..................... 4.75% 11/03/20 3,262,832
8,911,211 U.S. Renal Care, Inc., Term Loan B.............................. 5.25% 12/30/22 8,524,107
---------------
23,994,270
---------------
HYPERMARKETS & SUPER CENTERS -- 1.4%
14,511,285 BJ's Wholesale Club, Inc., 2013 (November) Replacement
Loan (Second Lien)........................................... 8.50% 03/26/20 14,547,564
994,779 BJ's Wholesale Club, Inc., New 2013 (November) Replacement
Loan (First Lien)............................................ 4.50% 09/26/19 995,714
---------------
15,543,278
---------------
INDUSTRIAL CONGLOMERATES -- 0.3%
2,916,926 Gardner Denver, Inc., Initial Dollar Term Loan.................. 4.25% 07/30/20 2,828,747
---------------
INSURANCE BROKERS -- 0.4%
1,500,000 Amwins Group LLC, Term Loan (2nd Lien).......................... 9.50% 09/06/20 1,515,945
2,500,000 Confie Seguros Holding II Co., Term Loan B...................... 5.75% 04/19/22 2,470,825
---------------
3,986,770
---------------
LEISURE FACILITIES -- 0.1%
329,358 Life Time Fitness, Inc., Closing Date Term Loan................. 4.25% 06/10/22 329,101
960,276 Planet Fitness Holdings LLC, Term Loan.......................... 4.50% 03/31/21 960,276
---------------
1,289,377
---------------
LIFE SCIENCES TOOLS & SERVICES -- 0.8%
989,717 Immucor, Inc., Term B-2 Loan.................................... 5.00% 08/19/18 965,964
5,833,333 inVentiv Health, Inc., Term Loan B.............................. 4.75% 11/09/23 5,830,183
1,964,824 Ortho-Clinical Diagnostics, Inc. (Crimson Merger Sub, Inc.),
Initial Term Loan............................................ 4.75% 06/30/21 1,917,334
---------------
8,713,481
---------------
MANAGED HEALTH CARE -- 0.0%
459,251 MultiPlan, Inc. (MPH Acquisition Holdings LLC), Term
Loan B....................................................... 5.00% 06/15/23 463,986
---------------
Page 18 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (d) MATURITY (e) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
MOVIES & ENTERTAINMENT -- 0.2%
$ 786,050 Creative Artists Agency LLC (CAA Holdings LLC), Term
Loan B....................................................... 5.00% 12/17/21 $ 790,963
1,464,182 WME IMG Worldwide, Inc., Term Loan (First Lien)................. 5.25% 05/06/21 1,470,405
---------------
2,261,368
---------------
OIL & GAS EXPLORATION & PRODUCTION -- 0.0%
1,027,778 American Energy Marcellus Holdings LLC (Ascent Resources -
Marcellus LLC), Initial Loan (Second Lien)................... 8.50% 08/04/21 91,215
---------------
OIL & GAS STORAGE & TRANSPORTATION -- 0.1%
1,000,000 Fieldwood Energy LLC, Closing Date Loan (Second Lien)........... 8.38% 09/30/20 587,500
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES -- 0.3%
904,618 First Data Corp., 2021C New Dollar Term Loan.................... 3.52% 03/24/21 908,236
2,000,000 First Data Corp., New 2022 Dollar Term Loan..................... 4.27% 07/10/22 2,013,760
---------------
2,921,996
---------------
PACKAGED FOODS & MEATS -- 3.4%
11,850,000 Amplify Snack Brands, Inc., Term Loan B......................... 6.50% 08/31/23 11,809,236
4,806,010 New HB Acquisition LLC, Term B Loan (First Lien)................ 4.50% 08/03/22 4,837,537
19,503,813 New HB Acquisition LLC, Term B Loan (Second Lien)............... 8.50% 08/03/23 19,613,619
---------------
36,260,392
---------------
PAPER PACKAGING -- 0.3%
2,772,312 Reynolds Group Holdings, Inc., 2016 US Term Loans............... 4.25% 02/05/23 2,778,495
---------------
PHARMACEUTICALS -- 3.4%
15,972,719 Concordia Healthcare Corp., Initial Dollar Term Loan............ 5.25% 10/21/21 14,286,959
5,400,000 Horizon Pharma, Inc., Incremental Term Loan..................... 5.50% 05/07/21 5,406,750
3,390,037 Horizon Pharma, Inc., Term Loan B............................... 4.50% 04/30/21 3,390,037
498,724 Patheon, Inc. (JLL/Delta Dutch Newco B.V.), Initial Dollar
Term Loan.................................................... 4.25% 03/11/21 498,934
13,502,210 Valeant Pharmaceuticals International, Inc., Series F-1
Tranche B Term Loan.......................................... 5.50% 04/01/22 13,451,576
---------------
37,034,256
---------------
PROPERTY & CASUALTY INSURANCE -- 0.1%
600,000 Sedgwick Claims Management Services, Inc., Initial Loan
(Second Lien)................................................ 6.75% 02/28/22 594,750
---------------
REAL ESTATE SERVICES -- 0.7%
7,145,162 DTZ Worldwide Ltd., 2015-1 Additional Term Loan................. 4.25% 11/04/21 7,124,298
---------------
RESEARCH & CONSULTING SERVICES -- 1.8%
12,684,308 Acosta, Inc., Term Loan B....................................... 4.25% 09/26/21 12,189,620
7,153,270 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)................................................. 4.25% 07/23/21 7,078,733
---------------
19,268,353
---------------
RESTAURANTS -- 1.3%
757,236 Focus Brands, Inc., Term Loan................................... 5.00% 10/05/23 765,127
720,000 Landry's Restaurants, Inc., Term Loan B......................... 4.00% 09/19/23 723,902
1,685,000 Portillo's Holdings LLC, Second Lien Term Loan.................. 9.00% 08/15/22 1,676,575
8,191,765 Portillo's Holdings LLC, Term B Loan (First Lien)............... 5.50% 08/02/21 8,125,247
2,414,911 Red Lobster Management LLC, Initial Term Loan (First Lien)...... 6.25% 07/28/21 2,423,967
---------------
13,714,818
---------------
See Notes to Financial Statements Page 19
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (d) MATURITY (e) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
RETAIL REITS (EQUITY REAL ESTATE INVESTMENT TRUSTS) -- 0.2%
$ 2,250,000 Capital Automotive LLC, Term Loan (Second Lien)................. 6.00% 04/30/20 $ 2,261,250
---------------
SEMICONDUCTORS -- 0.8%
8,964,513 Micron Technology, Inc., Term Loan B............................ 4.29% 04/26/22 9,014,983
---------------
SOFT DRINKS -- 1.2%
13,007,864 Keurig Green Mountain, Inc. (Maple Holdings Acquisition
Corp.), Term B USD Loan...................................... 5.25% 03/03/23 13,167,210
---------------
SPECIALIZED CONSUMER SERVICES -- 1.5%
703,543 Asurion LLC, Incremental Tranche B-1 Term Loan.................. 5.00% 05/24/19 703,670
4,472,034 Asurion LLC, Incremental Tranche B-4 Term Loan.................. 5.00% 08/04/22 4,491,622
8,205,882 Asurion LLC, Term Loan (Second Lien)............................ 8.50% 03/03/21 8,263,980
2,440,338 Asurion LLC, Term Loan B5....................................... 4.75% 11/03/23 2,428,136
---------------
15,887,408
---------------
SPECIALTY STORES -- 0.7%
256,757 Coinstar, Inc., Term Loan B..................................... 5.25% 09/27/23 259,111
2,424,885 PetSmart, Inc., Term Loan B..................................... 4.00% 03/10/22 2,429,639
1,557,466 Toys "R" US-Delaware, Inc., Term B-2 Loan....................... 5.25% 05/25/18 1,461,417
3,704,361 Toys "R" US-Delaware, Inc., Term B4 Loan........................ 9.75% 04/25/20 3,382,563
---------------
7,532,730
---------------
SYSTEMS SOFTWARE -- 1.7%
4,069,575 Applied Systems, Inc., Initial Term Loan (Second Lien).......... 7.50% 01/24/22 4,093,748
4,782,609 Avast Software B.V. (Sybil Software LLC), Term Loan B........... 5.00% 09/30/22 4,825,652
5,613,014 BMC Software Finance, Inc., Initial US Term Loan................ 5.00% 09/10/20 5,523,542
2,706,112 Compuware Corp., Term Loan B.................................... 6.25% 12/31/19 2,712,038
425,000 Rocket Software, Inc., Term Loan................................ 5.25% 10/14/23 426,772
420,000 Virtu Financial, Inc., Term Loan B.............................. 4.25% 10/27/22 420,790
---------------
18,002,542
---------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS -- 0.4%
4,326,087 Vertiv, Inc. (Cortes NP Acquisition), Term Loan B............... 6.00% 11/30/23 4,299,049
---------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................................... 376,863,792
(Cost $377,655,733) ---------------
SHARES DESCRIPTION VALUE
---------------- -------------------------------------------------------------------------------------------- ---------------
RIGHTS -- 0.0%
ELECTRIC UTILITIES -- 0.0%
1,737 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) (f) (g)............................ 3,018
2,702 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) Claim (f) (g) (h).................. 0
---------------
TOTAL RIGHTS................................................................................ 3,018
(Cost $3,018) ---------------
MONEY MARKET FUNDS -- 5.9%
63,266,063 Morgan Stanley Institutional Liquidity Fund - Treasury
Portfolio - Institutional Class - 0.22% (i).............................................. 63,266,063
(Cost $63,266,063) ---------------
TOTAL INVESTMENTS -- 102.4%................................................................. 1,103,053,304
(Cost $1,100,900,635) (j) ---------------
Page 20 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
U.S. GOVERNMENT NOTES SOLD SHORT -- (5.9%)
$ (17,000,000) United States Treasury Note..................................... 1.00% 03/15/18 $ (17,055,453)
(3,650,000) United States Treasury Note..................................... 1.25% 11/30/18 (3,676,521)
(4,775,000) United States Treasury Note..................................... 1.50% 10/31/19 (4,843,827)
(2,000,000) United States Treasury Note..................................... 1.63% 12/31/19 (2,035,976)
(500,000) United States Treasury Note..................................... 2.00% 11/30/20 (515,420)
(700,000) United States Treasury Note..................................... 2.25% 04/30/21 (729,299)
(15,750,000) United States Treasury Note..................................... 2.75% 11/15/23 (16,938,322)
(5,000,000) United States Treasury Note..................................... 2.13% 05/15/25 (5,141,895)
(1,000,000) United States Treasury Note..................................... 2.00% 08/15/25 (1,017,344)
(11,000,000) United States Treasury Note..................................... 2.25% 11/15/25 (11,410,135)
---------------
TOTAL U.S. GOVERNMENT NOTES SOLD SHORT...................................................... (63,364,192)
(Proceeds $61,548,505) ---------------
NET OTHER ASSETS AND LIABILITIES -- 3.5%.................................................... 37,607,476
---------------
NET ASSETS -- 100.0%........................................................................ $ 1,077,296,588
===============
-----------------------------
(a) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P. ("First Trust"
or the "Advisor"). Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security-specific factors and assumptions, which
require subjective judgment. At October 31, 2016, securities noted as such
amounted to $385,307,478 or 35.8% of net assets.
(b) This security or a portion of this security is segregated as collateral
for investments sold short.
(c) These notes are Senior Payment-In-Kind ("PIK") Toggle Notes whereby the
issuer may, at its option, elect to pay interest on the notes (1) entirely
in cash or (2) entirely in PIK interest. Interest paid in cash will accrue
at the rate of 7.00% per annum ("Cash Interest Rate") and PIK interest
will accrue on the notes at a rate per annum equal to the Cash Interest
Rate plus 75 basis points. For the fiscal year ended October 31, 2016,
this security paid all of its interest in cash.
(d) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests generally pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium. These
base lending rates are generally (i) the lending rate offered by one or
more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more United States banks
or (iii) the certificate of deposit rate. Certain Senior Loans are subject
to a LIBOR floor that establishes a minimum LIBOR rate. The interest rate
shown reflects the rate in effect at October 31, 2016. When a range of
rates is disclosed, the Fund holds more than one contract within the same
tranche at varying rates.
(e) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(f) On October 3, 2016, Texas Competitive Electric Holdings (TCEH), completed
their reorganization in the form of a tax free spin off from their parent
company, Energy Future Holdings. As part of the reorganization, first lien
claim holders received equity in a new entity, TCEH Corp., cash held by
the new entity, tax receivable rights, and a beneficial interest in an
unsecured claim up to the parent company, Energy Future Holdings.
(g) Non-income producing security.
(h) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees, and
in accordance with provisions of the Investment Company Act of 1940, as
amended. At October 31, 2016, securities noted as such amounted to $0 or
0.0% of net assets.
(i) Interest rate shown reflects yield as of October 31, 2016.
(j) Aggregate cost for federal income tax purposes is $1,103,283,282. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$18,341,917 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$18,571,895.
See Notes to Financial Statements Page 21
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Corporate Bonds*.................................. $ 510,657,703 $ -- $ 510,657,703 $ --
Foreign Corporate Bonds*.......................... 152,262,728 -- 152,262,728 --
Senior Floating-Rate Loan Interests*.............. 376,863,792 -- 376,863,792 --
Rights*........................................... 3,018 -- 3,018 --**
Money Market Funds................................ 63,266,063 63,266,063 -- --
--------------- --------------- --------------- ---------------
Total Investments................................. $ 1,103,053,304 $ 63,266,063 $ 1,039,787,241 $ --**
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
U.S. Government Notes Sold Short.................. $ (63,364,192) $ -- $ (63,364,192) $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
** Investment is valued at $0.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2016.
Level 3 Rights that are fair valued by the Advisor's Pricing Committee are
footnoted in the Portfolio of Investments. The Level 3 Rights values are based
on unobservable and non-quantitative inputs. The Trust's Board of Trustees has
adopted valuation procedures that are utilized by the Advisor's Pricing
Committee to oversee the day-to-day valuation of the Fund's investments. The
Advisor's Pricing Committee, through the Fund's fund accounting agent, monitors
the daily pricing via tolerance checks and stale and unchanged price reviews.
The Advisor's Pricing Committee also reviews monthly back testing of third-party
pricing service prices by comparing sales prices of the Fund's investments to
prior day third-party pricing service prices. Additionally, the Advisor's
Pricing Committee reviews periodic information from the Fund's third-party
pricing service that compares secondary market trade prices to their daily
valuations.
Page 22 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2015
Senior Floating-Rate Loan Interests $ 842,527
Rights --
Net Realized Gain (Loss):
Senior Floating-Rate Loan Interests 3,179
Change in Unrealized Appreciation / Depreciation:
Senior Floating-Rate Loan Interests 2,120
Purchases:
Rights --*
Sales:
Senior Floating-Rate Loan Interests (847,826)
Transfers In --
Transfers Out --
------------------
ENDING BALANCE AT OCTOBER 31, 2016
Senior Floating-Rate Loan Interests --
Rights --*
------------------
Total Level 3 holdings $ --*
==================
* Investment is valued at $0.
There was no change in unrealized appreciation (depreciation) from Level 3
investments held as of October 31, 2016.
See Notes to Financial Statements Page 23
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value..................................................... $ 1,103,053,304
Restricted cash........................................................... 59,134,596
Receivables:
Investment securities sold............................................. 10,458,383
Interest............................................................... 12,519,731
Capital shares sold.................................................... 2,417,795
---------------
Total Assets........................................................ 1,187,583,809
---------------
LIABILITIES:
Investments sold short, at value (proceeds $61,548,505)................... 63,364,192
Due to custodian.......................................................... 413,299
Payables:
Investment securities purchased........................................ 45,224,653
Investment advisory fees............................................... 859,773
Interest on investments sold short..................................... 424,410
Margin interest expense................................................ 894
---------------
Total Liabilities................................................... 110,287,221
---------------
NET ASSETS................................................................ $ 1,077,296,588
===============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 1,086,575,919
Par value................................................................. 223,000
Accumulated net investment income (loss).................................. --
Accumulated net realized gain (loss) on investments and
investments sold short................................................. (9,839,313)
Net unrealized appreciation (depreciation) on investments and
investments sold short................................................. 336,982
---------------
NET ASSETS................................................................ $ 1,077,296,588
===============
NET ASSET VALUE, per share................................................ $ 48.31
===============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)................................. 22,300,002
===============
Investments, at cost...................................................... $ 1,100,900,635
===============
Page 24 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest.................................................................. $ 49,192,518
---------------
Total investment income................................................ 49,192,518
---------------
EXPENSES:
Investment advisory fees.................................................. 7,599,976
Interest on investments sold short........................................ 1,134,360
Margin interest expense................................................... 112,707
---------------
Total expenses......................................................... 8,847,043
---------------
NET INVESTMENT INCOME (LOSS).............................................. 40,345,475
---------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................ (5,435,774)
Investments sold short................................................. 1,638
---------------
Net realized gain (loss)............................................... (5,434,136)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................ 15,322,506
Investments sold short................................................. (929,559)
---------------
Net change in unrealized appreciation (depreciation)...................... 14,392,947
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 8,958,811
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 49,304,286
===============
See Notes to Financial Statements Page 25
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
10/31/2016 10/31/2015
--------------- ---------------
OPERATIONS:
Net investment income (loss)........................................... $ 40,345,475 $ 22,421,293
Net realized gain (loss)............................................... (5,434,136) (465,756)
Net increase from payment by the advisor............................... -- 24,541
Net change in unrealized appreciation (depreciation)................... 14,392,947 (13,012,099)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations........ 49,304,286 8,967,979
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (41,910,270) (23,871,521)
Net realized gain...................................................... -- (1,043,000)
Return of capital...................................................... (2,821,485) (332,485)
--------------- ---------------
Total distributions to shareholders.................................... (44,731,755) (25,247,006)
--------------- ---------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 828,606,666 382,508,142
Cost of shares redeemed................................................ (276,836,722) (24,808,028)
--------------- ---------------
Net increase (decrease) in net assets resulting
from shareholder transactions....................................... 551,769,944 357,700,114
--------------- ---------------
Total increase (decrease) in net assets................................ 556,342,475 341,421,087
NET ASSETS:
Beginning of period.................................................... 520,954,113 179,533,026
--------------- ---------------
End of period.......................................................... $ 1,077,296,588 $ 520,954,113
=============== ===============
Accumulated net investment income (loss) at end of period.............. $ -- $ --
=============== ===============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 10,700,002 3,500,002
Shares sold............................................................ 17,450,000 7,700,000
Shares redeemed........................................................ (5,850,000) (500,000)
--------------- ---------------
Shares outstanding, end of period...................................... 22,300,002 10,700,002
=============== ===============
Page 26 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations .......... $ 49,304,286
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments............................................ (1,304,089,334)
Borrowed investments sold short..................................... 11,049,044
Cost to cover short positions....................................... (14,382,437)
Sales, maturities and paydowns of investments....................... 765,635,207
Net amortization/accretion of premiums/discounts on investments
and investments sold short....................................... 655,624
Net realized gain/loss on investments and investments sold short.... 5,434,136
Net change in unrealized appreciation/depreciation on investments... (15,322,506)
Net change in unrealized appreciation/depreciation on investments
sold short....................................................... 929,559
Increase in restricted cash ........................................ (14,594,166)
CHANGES IN ASSETS AND LIABILITIES
Increase in interest receivable..................................... (4,733,288)
Increase in interest payable on investments sold short.............. 26,119
Decrease in interest expense payable on investments sold short...... (4,222)
Increase in investment advisory fees payable........................ 461,900
---------------
CASH USED IN OPERATING ACTIVITIES......................................... $ (519,630,078)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold........................................... 828,626,594
Cost of shares redeemed............................................. (276,836,722)
Distributions to shareholders from net investment income............ (41,910,270)
Distributions to shareholders from return of capital................ (2,821,485)
---------------
CASH PROVIDED BY FINANCING ACTIVITIES..................................... 507,058,117
---------------
Decrease in cash.......................................................... (12,571,961)
Cash at beginning of period............................................... 12,158,662
---------------
CASH AT END OF PERIOD..................................................... $ (413,299)
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................. $ 116,929
===============
See Notes to Financial Statements Page 27
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 2/25/2013 (a)
-------------------------------------------------- THROUGH
2016 2015 2014 10/31/2013
-------------- --------------- --------------- ---------------
Net asset value, beginning of period $ 48.69 $ 51.30 $ 51.16 $ 50.00
---------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 2.41 2.64 2.58 1.93
Net realized and unrealized gain (loss) (0.14) (2.23) (b) 0.29 1.38
---------- ----------- ----------- -----------
Total from investment operations 2.27 0.41 2.87 3.31
---------- ----------- ----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (2.48) (2.84) (2.73) (2.15)
Net realized gain -- (0.14) -- --
Return of capital (0.17) (0.04) -- --
---------- ----------- ----------- -----------
Total distributions (2.65) (3.02) (2.73) (2.15)
---------- ----------- ----------- -----------
Net asset value, end of period $ 48.31 $ 48.69 $ 51.30 $ 51.16
========== =========== =========== ===========
TOTAL RETURN (c) 4.89% 0.80% (b) 5.72% 6.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,077,297 $ 520,954 $ 179,533 $ 74,178
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 1.11% 1.23% 1.29% 1.28% (d)
Ratio of total expenses to average net assets
excluding interest expense 0.95% 0.95% 0.95% 0.95% (d)
Ratio of net investment income (loss) to average
net assets 5.04% 5.49% 5.02% 5.10% (d)
Portfolio turnover rate (e) 45% 34% 54% 52%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) The Fund received a payment from the advisor in the amount of $24,541 in
connection with a trade error. The payment from the advisor represents
less than $0.01 per share and had no effect on the Fund's total return.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 28 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Tactical High Yield ETF (the "Fund"), which trades
under the ticker "HYLS" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash and, in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The primary investment objective of the Fund is to provide current income. The
Fund's secondary investment objective is to provide capital appreciation. The
Fund seeks to achieve its investment objectives by investing at least 80% of its
net assets (including investment borrowings) in high yield debt securities that
are, under normal market conditions, rated below investment grade at the time of
purchase or unrated securities deemed by the Fund's advisor to be of comparable
quality. Below investment grade securities are those that, at the time of
purchase, are rated lower than "BBB-" by Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., or lower than "Baa3" by Moody's
Investors Service, Inc., or comparably rated by another nationally recognized
statistical rating organization. High yield debt securities that are rated below
investment grade are commonly referred to as "junk" bonds. Such securities may
include U.S. and non-U.S. corporate debt obligations, bank loans and convertible
bonds. For purposes of determining whether a security is below investment grade,
the lowest available rating will be considered. As part of its investment
strategy, the Fund intends to maintain both long and short positions in
securities under normal market conditions. The Fund will take long positions in
securities that the Advisor believes in the aggregate to have the potential to
outperform the Fund's benchmark, the BofA Merrill Lynch US High Yield
Constrained Index (the "Index"). The Fund will take short positions in
securities that the Advisor believes will decline or in the aggregate will
underperform the Index. The Fund's long positions may total up to 130% of the
Fund's net assets. The Fund's short positions will range between 0% and 30% of
the Fund's net assets. Under normal market conditions, the Fund takes short
positions in U.S. Treasury securities and/or corporate debt obligations, which
may be rated investment grade or rated or deemed to be high-yield securities.
The Fund may also, under normal market conditions, invest up to 30% of its net
assets (plus the amount of any borrowing for investment purposes) in U.S.
exchange-traded options on futures contracts and U.S. exchange-traded futures
contracts. There can be no assurance that the Fund's investment objective will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee in
accordance with valuation procedures adopted by the Trust's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, corporate notes, U.S. government securities and other
debt securities are fair valued on the basis of valuations provided by
dealers who make markets in such securities or by a third-party pricing
service approved by the Trust's Board of Trustees, which may use the
following valuation inputs when available:
Page 29
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Shares of open-end funds are valued at fair value which is based on NAV
per share.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
The Senior Floating-Rate Loan Interests ("Senior Loans")(1) in which the
Fund invests are not listed on any securities exchange or board of trade.
Senior Loans are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many
respects like an over-the-counter secondary market, although typically no
formal market-makers exist. This market, while having grown substantially
since its inception, generally has fewer trades and less liquidity than
the secondary market for other types of securities. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be
based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically,
Senior Loans are fair valued using information provided by a third-party
pricing service. The third-party pricing service primarily uses
over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a third-party pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the third-party pricing service, does not reflect
the security's fair value. As a general principle, the current fair value of a
security would appear to be the amount which the owner might reasonably expect
to receive for the security upon its current sale. When fair value prices are
used, generally they will differ from market quotations or official closing
prices on the applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited to,
the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities of the
issuer/borrower, or comparable companies;
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 30
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method over
the expected life of each respective borrowing for loans.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments. The Fund
did not have any when-issued, delayed-delivery, or forward purchase commitments
as of October 31, 2016.
C. SHORT SALES
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When the Fund engages in a short sale, the Fund
must borrow the security sold short and deliver the security to the
counterparty. Short selling allows the Fund to profit from a decline in a market
price to the extent such decline exceeds the transaction costs and the costs of
borrowing the securities. The Fund is charged a fee or premium to borrow the
securities sold short and is obligated to repay the lenders of the securities.
Any dividends or interest that accrues on the securities during the period of
the loan are due to the lenders. A gain, limited to the price at which the
security was sold short, or a loss, unlimited in size, will be recognized upon
the termination of the short sale; which is effected by the Fund purchasing the
security sold short and delivering the security to the lender. Any such gain or
loss may be offset, completely or in part, by the change in the value of the
long portion of the Fund's portfolio. The Fund is subject to the risk it may be
unable to reacquire a security to terminate a short position except at a price
substantially in excess of the last quoted price. Also, there is the risk that
the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
Page 31
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
The Fund has established an account with Pershing, LLC for the purpose of
purchasing or borrowing securities on margin. The Fund pays interest on any
margin balance, which is calculated as the daily margin account balance times
the broker's margin interest rate. At October 31, 2016, the Fund had $59,134,596
in restricted cash associated with investments sold short and $63,364,192 of
investments sold short as shown on the Statement of Asset and Liabilities.
Interest is charged on these balances at a rate equal to the Overnight Bank
Funding Rate plus 75 basis points and is charged on payable credit margin
balances at a rate equal to the Overnight Bank Funding Rate less 40 basis
points. On September 1, 2016, the Overnight Bank Funding Rate replaced the
Federal Funds Rate. At October 31, 2016, the Fund had a debit margin balance
with an interest rate of 1.16%. For the fiscal year ended October 31, 2016,
margin interest expense was $112,707, which is shown in "Margin interest
expense" on the Statement of Operations. For the fiscal year ended October 31,
2016, the average margin balance and interest rates were $10,320,888 and 1.09%,
respectively.
D. UNFUNDED LOAN COMMITMENTS
The Fund may enter into credit agreements, all or a portion of which may be
unfunded. The Fund is obligated to fund these loan commitments at the borrower's
discretion. The Fund had no unfunded loan commitments as of October 31, 2016.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on significantly modified portfolio securities
held by the Fund and have no impact on net assets or NAV per share. Temporary
differences, which arise from recognizing certain items of income, expense and
gain/loss in different periods for financial statement and tax purposes, will
reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income.............................. $ 41,910,270 $ 24,914,521
Capital gain................................. -- --
Return of capital............................ 2,821,485 332,485
As of October 31, 2016, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................ $ --
Accumulated capital and other gain (loss).... (7,446,666)
Net unrealized appreciation (depreciation)... (2,055,665)
F. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
As of October 31, 2016, the Fund has non-expiring capital loss carryforwards of
$7,446,666 for federal income tax purposes. The Fund is subject to certain
limitations under U.S. tax rules on the use of capital loss carryforwards and
net unrealized built-in losses. These limitations apply when there has been a
50% change in ownership.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no
net ordinary losses.
Page 32
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2013,
2014, 2015 and 2016 remain open to federal and state audit. As of October 31,
2016, management has evaluated the application of these standards to the Fund
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statement of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of premium amortization and paydown gains and losses on various investment
securities held by the Fund. The results of operations and net assets were not
affected by these adjustments. For the fiscal year ended October 31, 2016, the
adjustments for the Fund were as follows:
ACCUMULATED ACCUMULATED
NET INVESTMENT NET REALIZED GAIN (LOSS)
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
----------------- ------------------------- -----------------
$ 1,564,795 $ (1,564,795) $ --
G. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3). The Fund is subject to an interest expense
due to the costs associated with the Fund's short positions in securities.
H. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016 the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a 12b-1 plan, if any,
and extraordinary expenses. The Fund has agreed to pay First Trust an annual
unitary management fee equal to 0.95% of its average daily net assets.
During the year ended October 31, 2015, the Fund received a payment from the
Advisor of $24,541 in connection with a trade error.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund or is an index fund.
Page 33
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended October 31, 2016, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, investments sold
short and in-kind transactions, were $865,172,290 and $373,688,908,
respectively. The cost of purchases to cover short sales and the proceeds of
short sales were $14,382,437 and $11,049,044, respectively.
For the fiscal year ended October 31, 2016, the Fund had no in-kind
transactions.
5. BORROWINGS
The Trust, on behalf of the Fund, along with the First Trust Series Fund and
First Trust Variable Insurance Trust, entered into a $135 million Credit
Agreement ("Line of Credit") with BNYM, to be a liquidity backstop during
periods of high redemption volume. A commitment fee of 0.15% of the daily amount
of the excess of the commitment amount over the outstanding principal balance of
the loans will be charged by BNYM, which First Trust allocates amongst the funds
that had access to the Line of Credit. Prior to November 10, 2015, the Line of
Credit was $80 million. To the extent that the Fund accesses the Line of Credit,
there would also be an interest fee charged. The Fund did not have any
borrowings outstanding during the fiscal year ended October 31, 2016.
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make or receive a cash payment referred to as the "Cash Component," which is an
amount equal to the difference between the NAV of the Fund Shares (per Creation
Unit Aggregation) and the market value of the Deposit Securities, and/or (ii)
cash in lieu of all or a portion of the Deposit Securities. The Fund's Creation
Units are generally issued and redeemed for cash. If the Cash Component is a
positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit
Amount), the Authorized Participant 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 Authorized Participant will receive the Cash
Component. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. 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 the 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.
Authorized Participants redeeming Creation Units must pay to BNYM, as transfer
agent, a redemption transaction fee (the "Redemption Transaction Fee"),
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 the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 31, 2018.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On November 21, 2016, the Fund declared a distribution of $0.205 per share to
shareholders of record on November 25, 2016, payable November 30, 2016.
Page 35
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST TACTICAL HIGH YIELD
ETF:
We have audited the accompanying statement of assets and liabilities of First
Trust Tactical High Yield ETF (the "Fund"), a series of the First Trust
Exchange-Traded Fund IV, including the portfolio of investments, as of October
31, 2016, and the related statements of operations and cash flows for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2016, by correspondence with the Fund's
custodian, brokers, and agent banks; where replies were not received from
brokers and agent banks, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Tactical High Yield ETF as of October 31, 2016, the results of its
operations and cash flows for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 22, 2016
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ADDITIONAL INFORMATION
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Trust's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with SEC
for the first and third quarters of each fiscal year on Form N-Q. The Trust's
Forms N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
FEDERAL TAX INFORMATION
Distributions paid to the foreign shareholders between the period January 1,
2016 and October 31, 2016 that were properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," may not be
subject to federal income tax provided that the income was earned directly by
such foreign shareholders.
For the taxable year ended October 31, 2016, the following percentages of income
dividend paid by the Fund qualify for the dividends received deduction available
to corporations and is hereby designated as qualified dividend income:
Dividends Received Deduction Qualified Dividend Income
---------------------------- -------------------------
0.00% 0.00%
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND IV.
The following summarizes some of the risks that should be considered for the
Fund.
BANK LOANS RISK: An investment in bank loans subjects the Fund to credit risk,
which is heightened for bank loans in which the Fund invests because companies
that issue such loans tend to be highly leveraged and thus are more susceptible
to the risks of interest deferral, default and/or bankruptcy. Senior Loans, in
which the Fund may invest, are usually rated below investment grade but may also
be unrated. As a result, the risks associated with these Senior Loans are
similar to the risks of high yield fixed income instruments. An economic
downturn would generally lead to a higher non-payment rate, and a Senior Loan
may lose significant market value before a default occurs. Moreover, any
specific collateral used to secure a Senior Loan may decline in value or become
illiquid, which would adversely affect the Senior Loan's value. Unlike the
securities markets, there is no central clearinghouse for loan trades, and the
loan market has not established enforceable settlement standards or remedies for
failure to settle. Therefore, portfolio transactions in Senior Loans may have
uncertain settlement time periods. Senior Loans are subject to a number of risks
described elsewhere in this prospectus, including liquidity risk and the risk of
investing in below investment grade fixed income instruments. Furthermore,
increases in interest rates may result in greater volatility of Senior Loans and
average duration may fluctuate with fluctuations in interest rates.
CALL RISK: If an issuer calls higher-yielding securities held by the Fund,
performance could be adversely impacted.
CASH TRANSACTIONS RISK: The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an exchange-traded fund that effects its creations and redemption
for in-kind securities. Because the Fund may effect a portion of redemptions for
cash, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. A sale of shares may result in
capital gains or losses and may also result in higher brokerage costs.
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
CONVERTIBLE BONDS RISK: The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
COUNTERPARTY RISK: Certain Derivative Instruments that involve counterparties
subject the Fund to the risk that the counterparty could default on its
obligations under the agreement, either through the counterparty's bankruptcy or
failure to perform its obligations. In the event of default, the Fund could
experience lengthy delays in recovering some or all of its assets or no recovery
at all. The Fund's investments in the futures markets also introduce the risk
that its futures commission merchant ("FCM") would default on an obligation set
forth in an agreement between the Fund and the FCM, including the FCM's
obligation to return margin posted in connection with the Fund's futures
contracts.
CREDIT RISK: Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments. Credit risk may be heightened
for the Fund because it invests a substantial portion of its net assets in high
yield or "junk" debt; such securities, while generally offering higher yields
than investment grade debt with similar maturities, involve greater risks,
including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
CURRENCY RISK: Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in foreign securities, you may lose money if
the local currency of a foreign market depreciates against the U.S. dollar, even
if the local currency value of the Fund's holdings goes up. The Fund intends to
hedge its non-U.S. dollar holdings.
DERIVATIVES RISK: The use of Derivative Instruments can lead to losses because
of adverse movements in the price or value of the underlying asset, index or
rate, which may be magnified by certain features of the Derivative Instruments.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
DISTRESSED SECURITIES RISK: The Fund may invest in Distressed Securities,
including stressed, distressed and bankrupt issuers and debt obligations that
are in default. In any investment involving Distressed Securities, there exists
the risk that the transaction involving such securities will be unsuccessful.
Distressed Securities might be repaid only after lengthy workout or bankruptcy
proceedings, during which the issuer might not make any interest or other
payments. Many Distressed Securities are illiquid or trade in low volumes and
thus may be more difficult to value. Companies whose financial condition is
troubled or uncertain and that may be involved in bankruptcy proceedings,
reorganizations or financial restructurings are referred to herein as
"Distressed Securities."
HIGH YIELD SECURITIES RISK: High yield securities are subject to greater market
fluctuations and risk of loss than securities with higher ratings. These
securities are issued by companies that may have limited operating history,
narrowly focused operations, and/or other impediments to the timely payment of
periodic interest and principal at maturity. If the economy slows down or dips
into recession, the issuers of high yield securities may not have sufficient
resources to continue making timely payment of periodic interest and principal
at maturity. The market for high yield securities is smaller and less liquid
than that for investment grade securities. High yield securities are generally
not listed on a national securities exchange but trade in the over-the-counter
markets. Due to the smaller, less liquid market for high yield securities, the
bid-offer spread on such securities is generally greater than it is for
investment grade securities and the purchase or sale of such securities may take
longer to complete.
ILLIQUID SECURITIES RISK: Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
decline as the Fund invests the proceeds from new share sales, or from matured
or called debt securities, at interest rates that are below the portfolio's
current earnings rate.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term debt
securities and higher for longer term debt securities. Duration is a measure of
the expected price volatility of a debt security as a result of changes in
market rates of interest, based on, among other factors, the weighted average
timing of the debt security's expected principal and interest payments.
Page 38
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
In general, duration represents the expected percentage in the value of a
security for an immediate 1% change in interest rates. Therefore, prices of debt
securities with shorter durations tend to be less sensitive to interest rate
changes than debt securities with longer durations. As the value of a debt
security changes over time, so will its duration.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders. As of the fourth quarter of 2015, the market for high yield
debt has experienced decreased liquidity, and investor perception of increased
risk has caused yield spreads to widen. Decreased liquidity may negatively
affect the Fund's ability to mitigate risk and meet redemptions.
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
OTHER DEBT SECURITIES RISK: Secured loans that are not first lien, loans that
are unsecured and debt securities are subject to many of the same risks that
affect senior loans; however they are often unsecured and/or lower in the
issuer's capital structure than senior loans, and thus may be exposed to greater
risk of default and lower recoveries in the event of a default. This risk can be
further heightened in the case of below investment grade instruments.
Additionally, most fixed-income securities are fixed-rate and thus are generally
more susceptible than floating rate loans to price volatility related to changes
in prevailing interest rates.
PREPAYMENT RISK: Loans are subject to pre-payment risk. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among loan investors, among
others. As such, prepayments cannot be predicted with accuracy. Upon a
prepayment, either in part or in full, the actual outstanding debt on which the
Fund derives interest income will be reduced. The Fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid loan.
SHORT SALE RISK: The Fund uses short sales for investment and risk management
purposes, including when the Fund's advisor anticipates that the market price of
securities will decline or in the aggregate will underperform the Index. In
times of unusual or adverse market, economic, regulatory or political
conditions, the Fund may not be able, fully or partially, to implement its short
selling strategy. Periods of unusual or adverse market, economic, regulatory or
political conditions may exist for relatively long periods of time. The Fund
will have substantial short positions and must borrow those securities to make
delivery to the buyer. The Fund may not be able to borrow a security that it
needs to deliver or it may not be able to close out a short position at an
acceptable price and may have to sell related long positions before it had
intended to do so. Thus, the Fund may not be able to successfully implement its
short sale strategy due to limited availability of desired securities or for
other reasons. Also, there is the risk that the counterparty to a short sale may
fail to honor its contractual terms, causing a loss to the Fund.
Page 39
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund IV
(the "Trust"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Agreement") with First
Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First
Trust Tactical High Yield ETF (the "Fund"). The Board approved the continuation
of the Agreement for a one-year period ending June 30, 2017 at a meeting held on
June 13, 2016. The Board determined that the continuation of the Agreement is in
the best interests of the Fund in light of the extent and quality of the
services provided and such other matters as the Board considered to be relevant
in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Trustees that, among other things, outlined the services provided by the Advisor
to the Fund (including the relevant personnel responsible for these services and
their experience); the unitary fee rate payable by the Fund as compared to fees
charged to a peer group of funds which were also exchange-traded funds ("ETFs")
compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI
Peer Group"), and as compared to fees charged to other clients of the Advisor,
including other ETFs managed by the Advisor; expenses of the Fund as compared to
expense ratios of the funds in the MPI Peer Group; performance information for
the Fund; the nature of expenses incurred in providing services to the Fund and
the potential for economies of scale, if any; financial data on the Advisor; any
fall-out benefits to the Advisor and its affiliate, First Trust Portfolios L.P.
("FTP"); and information on the Advisor's compliance program. The Board reviewed
initial materials with the Advisor at a special meeting held on April 22, 2016,
prior to which the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor. Following the April meeting,
independent legal counsel on behalf of the Independent Trustees requested
certain clarifications and supplements to the materials provided, and the
information provided in response to those requests was considered at an
executive session of the Independent Trustees and independent legal counsel held
prior to the June 13, 2016 meeting, as well as at the meeting held that day. The
Board applied its business judgment to determine whether the arrangement between
the Trust and the Advisor continues to be a reasonable business arrangement from
the Fund's perspective as well as from the perspective of the Fund's
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreement, the Board had received sufficient
information to renew the Agreement. The Board considered that shareholders chose
to invest or remain invested in the Fund knowing that the Advisor manages the
Fund and knowing the Fund's unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality
of the services provided by the Advisor under the Agreement. The Board
considered that the Advisor is responsible for the overall management and
administration of the Trust and the Fund and reviewed all of the services
provided by the Advisor to the Fund, as well as the background and experience of
the persons responsible for such services. The Board noted that the Fund is an
actively-managed ETF and noted that the Advisor's Leveraged Finance Investment
Team is responsible for the day-to-day management of the Fund's investments. The
Board considered the background and experience of the members of the Leveraged
Finance Investment Team. The Board considered the Advisor's statement that it
applies the same oversight model internally with its Leveraged Finance
Investment Team as it uses for overseeing external sub-advisors. In reviewing
the services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Advisor's and the Fund's compliance with the 1940 Act, as well as
the Fund's compliance with its investment objective and policies. In addition,
as part of the Board's consideration of the Advisor's services, the Advisor, in
its written materials and at the April 22, 2016 meeting, described to the Board
the scope of its ongoing investment in additional infrastructure and personnel
to maintain and improve the quality of services provided to the Fund and the
other funds in the First Trust Fund Complex. In light of the information
presented and the considerations made, the Board concluded that the nature,
extent and quality of the services provided to the Trust and the Fund by the
Advisor under the Agreement have been and are expected to remain satisfactory
and that the Advisor has managed the Fund consistent with the Fund's investment
objective and policies.
The Board considered the unitary fee rate payable by the Fund under the
Agreement for the services provided. The Board considered that as part of the
unitary fee the Advisor is responsible for the Fund's expenses, including the
cost of transfer agency, custody, fund administration, legal, audit and other
services and license fees (if any), but excluding interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if
any, and extraordinary expenses. The Board received and reviewed information
showing the advisory or unitary fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor to
Page 40
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
other fund (including ETFs) and non-fund clients. Because the Fund's MPI Peer
Group included peer funds that pay a unitary fee and because the Fund pays a
unitary fee, the Board determined that expense ratios were the most relevant
comparative data point. Based on the information provided, the Board noted that
the Fund's total (net) expense ratio (including expenses associated with short
sales) was above the median total (net) expense ratio of the peer funds in the
MPI Peer Group. With respect to the MPI Peer Group, the Board discussed with
representatives of the Advisor limitations in creating peer groups for
actively-managed ETFs and different business models that may affect the pricing
of services among ETF sponsors. The Board considered that the Fund's long/short
strategy generates additional expenses from short sales that are not present for
peer funds with long-only strategies. The Board took these limitations and
differences into account in considering the peer data. With respect to fees
charged to other clients, the Board considered differences between the Fund and
other clients that limited their comparability. In considering the unitary fee
rate overall, the Board also considered the Advisor's statement that it seeks to
meet investor needs through innovative and value-added investment solutions and
the Advisor's description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor for the Fund. The Board determined that this process continues to be
effective for reviewing the Fund's performance. The Board received and reviewed
information comparing the Fund's performance for periods ended December 31, 2015
to the performance of the MPI Peer Group and to a benchmark index. Based on the
information provided, the Board noted that the Fund outperformed the MPI Peer
Group average and the benchmark index for the one-year period ended December 31,
2015.
On the basis of all the information provided on the unitary fee and performance
of the Fund and the ongoing oversight by the Board, the Board concluded that the
unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the
Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board noted that any reduction
in fixed costs associated with the management of the Fund would benefit the
Advisor, but that the unitary fee structure provides a level of certainty in
expenses for the Fund. The Board considered the revenues and allocated costs
(including the allocation methodology) of the Advisor in serving as investment
advisor to the Fund for the twelve months ended December 31, 2015 and the
estimated profitability level for the Fund calculated by the Advisor based on
such data, as well as complex-wide and product-line profitability data for the
same period. The Board noted the inherent limitations in the profitability
analysis, and concluded that, based on the information provided, the Advisor's
profitability level for the Fund was not unreasonable. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund. The Board considered that the Advisor had
identified as a fall-out benefit to the Advisor and FTP their exposure to
investors and brokers who, absent their exposure to the Fund, may have had no
dealings with the Advisor or FTP, and noted that the Advisor does not utilize
soft dollars in connection with its management of the Fund's portfolio.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Trust and the Fund. No single
factor was determinative in the Board's analysis.
Page 41
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
REMUNERATION
First Trust Advisors L.P. ("First Trust") is authorised and regulated by the
U.S. Securities and Exchange Commission and is entitled to market shares of the
First Trust Tactical High Yield ETF it manages (the "Fund") in the United
Kingdom in accordance with the cooperation arrangements in Article 42 of the
Alternative Investment Fund Managers Directive (the "Directive"). First Trust is
required under the Directive to make disclosures in respect of remuneration. The
following disclosures are made in line with First Trust's interpretation of
currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2015, the amount of remuneration paid (or to
be paid) by First Trust in respect of the Fund is $3,645,696. This figure is
comprised of $483,326 paid (or to be paid) in fixed compensation and $3,162,370
paid (or to be paid) in variable compensation. There were a total of 13
beneficiaries of the remuneration described above. Those amounts include
$135,632 paid (or to be paid) to senior management of First Trust and $3,510,064
paid (or to be paid) to other employees whose professional activities have a
material impact on the risk profiles of First Trust or the Fund (collectively,
"Code Staff").
Code Staff included in the aggregated figures disclosed above are rewarded in
line with First Trust's remuneration policy (the "Remuneration Policy") which is
determined and implemented by First Trust's senior management. The Remuneration
Policy reflects First Trust's ethos of good governance and encapsulates the
following principal objectives:
i. to provide a clear link between remuneration and performance of
First Trust and to avoid rewarding for failure;
ii. to promote sound and effective risk management consistent with the
risk profiles of the Funds managed by First Trust; and
iii. to remunerate staff in line with the business strategy, objectives,
values and interests of First Trust and the Funds managed by First
Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when
considering and implementing remuneration for Code Staff and considers whether
any potential award to such person(s) would give rise to a conflict of interest.
First Trust does not reward failure, or consider the taking of risk or failure
to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in
respect of performance-related remuneration of Code Staff by reference to a
broad range of measures including (i) individual performance (using financial
and non-financial criteria), and (ii) the overall performance of First Trust.
Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the
senior management sets fixed salaries at a level sufficient to ensure that
variable remuneration incentivises and rewards strong individual performance but
does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Page 42
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None
c/o First Trust Advisors L.P. Limited Partner Gundersen Real Estate
120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed
Suite 400 LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Inception Inc., ADM
Suite 400 Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 137 Director of Trust
c/o First Trust Advisors L.P. (Financial and Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Inception Harapan Educational Foundation(Educational Transport Inc.
Suite 400 Products and Services); President and (May 2003 to
Wheaton, IL 60187 Chief Executive Officer (June 2012 to May 2014)
D.O.B.: 03/54 September 2014), Servant Interactive LLC
(Educational Products and Services);
President and Chief Executive Officer
(June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None
Chairman of the Board Advisors L.P. and First Trust
120 E. Liberty Drive, o Since Inception Portfolios L.P.; Chairman of the
Suite 400 Board of Directors, BondWave LLC
Wheaton, IL 60187 (Software Development Company)
D.O.B.: 09/55 and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 43
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust Advisors
D.O.B.: 01/66 L.P. and First Trust Portfolios L.P.; Chief Financial
Officer, BondWave LLC (Software Development
Company) (January 2016 to Present) and
Stonebridge Advisors LLC (Investment Advisor)
(January 2016 to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice
Wheaton, IL 60187 President (September 2006 to April 2012),
D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/
Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 o Since Inception Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to
120 E. Liberty Drive, Present), Vice President (August 2005 to
Suite 400 o Since Inception September 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 11/70
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 44
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining that relationship. We are committed to protecting the
security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 45
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Enhanced Short
Maturity ETF (FTSM)
Annual Report
For the Year Ended
October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 5
Understanding Your Fund Expenses............................................. 7
Portfolio of Investments..................................................... 8
Statement of Assets and Liabilities.......................................... 22
Statement of Operations...................................................... 23
Statements of Changes in Net Assets.......................................... 24
Financial Highlights......................................................... 25
Notes to Financial Statements................................................ 26
Report of Independent Registered Public Accounting Firm...................... 32
Additional Information....................................................... 33
Board of Trustees and Officers............................................... 38
Privacy Policy............................................................... 40
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Enhanced Short Maturity ETF; hereinafter referred to as
the "Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of a relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Enhanced Short Maturity ETF.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
The investment objective of First Trust Enhanced Short Maturity ETF (the "Fund")
is to seek current income, consistent with preservation of capital and daily
liquidity. Under normal market conditions, the Fund intends to achieve its
investment objective by investing at least 80% of its net assets in a portfolio
of U.S. dollar-denominated fixed- and variable-rate instruments (collectively,
"Fixed Income Securities") issued by U.S. and non-U.S. public and private sector
entities. Fixed Income Securities will include the following types of fixed- and
variable-rate debt securities: corporate and government bonds and notes; agency
securities; instruments of non-U.S. issuers in developed markets; privately
issued securities; asset-backed securities; mortgage-related securities;
municipal bonds; and money market securities. Shares of the Fund are listed on
The Nasdaq Stock Market LLC under the ticker symbol "FTSM."
The Fund's investment advisor, First Trust Advisors L.P. (the "Advisor") selects
securities for the portfolio by evaluating fixed income sectors and macro market
trends while completing bottom-up analysis of individual securities. Portfolio
securities are selected based upon relative value in the context of overall
portfolio duration. Key inputs for the screens in the securities selection
process include, but are not limited to, credit quality, yield, interest rate
sensitivity and liquidity. The Fund's holdings are systematically monitored for
meaningful changes in performance and risk measures. A security will generally
be sold when the Advisor believes that a security can be substituted for a
similar investment that represents better relative value; it lacks adequate
compensation for embedded credit risk; or when rebalancing the portfolio to
maintain diversification. Under normal market conditions, the Fund's average
duration is expected to be below one year and the average maturity of the Fund's
portfolio is expected to be below three years.
--------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
--------------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (8/5/14) Inception (8/5/14)
10/31/16 to 10/31/16 to 10/31/16
FUND PERFORMANCE
NAV 0.94% 0.62% 1.39%
Market Price 0.99% 0.61% 1.38%
INDEX PERFORMANCE
BofA Merrill Lynch 0-1 Year U.S. Treasury Index 0.54% 0.33% 0.73%
--------------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
--------------------------------------------------------
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS & CASH
--------------------------------------------------------
Commercial Paper 35.09%
Corporate Bonds 33.61
Foreign Corporate Bonds 14.33
U.S. Government Agency Mortgage-
Backed Securities 10.02
Mortgage-Backed Securities 6.28
Asset-Backed Securities 0.43
U.S. Government Notes 0.21
Cash 0.03
-------
Total 100.00%
=======
--------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS & CASH
--------------------------------------------------------
Government 10.20%
AAA 4.05
AA+ 1.01
AA 0.05
AA- 5.19
A+ 5.14
A 8.20
A- 8.04
BBB+ 12.05
BBB 5.27
BBB- 4.17
A-2 (Short-Term) 19.83
A-3 (Short-Term) 15.26
Not Rated 1.51
Cash 0.03
-------
Total 100.00%
=======
--------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
--------------------------------------------------------
Humana, Inc. 1.08%
Amgen, Inc. 0.86
Volkswagen Group of America
Finance LLC 0.86
Wyndham Worldwide Corp. 0.86
Nabors Industries, Inc. 0.86
Plains All American Pipeline, L.P. 0.86
Enterprise Products Operating LLC 0.86
UBS AG/Stanford CT, Global
Medium-Term Note 0.83
AT&T, Inc. 0.80
LB-UBS Commercial Mortgage
Trust 2007-C7, Class A3 0.80
-------
Total 8.67%
=======
-----------------------------
(1) The ratings are by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO) of the
creditworthiness of an issuer with respect to debt obligations. Ratings
are measured highest to lowest on a scale that generally ranges from AAA
to D for long-term ratings and A-1+ to C for short-term ratings.
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher or a short-term credit rating of A-3 or higher.
The credit ratings shown relate to the credit worthiness of the issuers of
the underlying securities in the Fund, and not to the Fund or its shares.
U.S. Treasury and U.S. Agency mortgage-backed securities appear under
"Government". Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 5, 2014 - OCTOBER 31, 2016
First Trust Enhanced BofA Merrill Lynch 0-1 Year
Short Maturity ETF U.S. Treasury Index
8/5/14 $10,000 $10,000
10/31/14 10,016 10,002
4/30/15 10,047 10,011
10/31/15 10,045 10,020
4/30/16 10,079 10,045
10/31/16 10,138 10,073
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period August 6, 2014 (commencement
of trading) through October 31, 2016. 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. Data presented
represents past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
------------------------------------- -------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
8/6/14 - 10/31/14 47 0 0 0 15 0 0 0
11/1/14 - 10/31/15 54 0 0 0 197 0 0 0
11/1/15 - 10/31/16 101 0 0 0 151 0 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust") is the investment advisor to the First
Trust Enhanced Short Maturity ETF (the "Fund" or "FTSM"). In this capacity,
First Trust is responsible for the selection and ongoing monitoring of the
investments in the Fund's portfolio and certain other services necessary for the
management of the portfolio. First Trust serves as advisor or sub-advisor for
seven mutual fund portfolios, ten exchange-traded trusts consisting of 114
series and 15 closed-end funds and is also the portfolio supervisor of certain
unit investment trusts sponsored by First Trust Portfolios L.P. ("FTP").
PORTFOLIO MANAGEMENT TEAM
TODD LARSON, CFA - VICE PRESIDENT, PORTFOLIO MANAGER
JEREMIAH CHARLES - VICE PRESIDENT, PORTFOLIO MANAGER
JAMES SNYDER - VICE PRESIDENT, PORTFOLIO MANAGER
ERIC MAISEL, CFA - VICE PRESIDENT, PORTFOLIO MANAGER
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST ENHANCED SHORT MATURITY ETF
The Fund is an actively-managed exchange-traded fund. Its investment object is
to seek current income, consistent with preservation of capital and daily
liquidity.
MARKET RECAP
The early part of the reporting period was characterized by a great deal of
uncertainty in the financial markets. Catalysts for the turmoil included marked
deterioration in commodity and energy prices as well as apprehension over the
future path of monetary policy after the Federal Reserve (the "Fed") raised
rates by 0.25% last December. As it turned out, questions over weaker global
growth, primarily in China, along with falling commodity prices, prevented the
Fed from hiking rates further. By mid-February, the negative market sentiment
shifted dramatically in a positive direction, aided in part by new stimulus
measures introduced by the Bank of Japan ("BoJ") and the European Central Bank
("ECB"). This served to rally equity and commodity markets while also narrowing
credit spreads.
The spread rally continued into the second quarter as fears about growth in
China subsided and sentiment in the oil and basic materials markets steadily
improved. However, as the May new issue calendar reached the highest monthly
level on record, and as the Fed stepped up its hawkish rhetoric, the rally
stalled and spreads widened modestly into June. The Fed did not raise rates in
June after talking up the odds of a hike in weeks prior. We believe this was a
catalyst for a rally in U.S. Treasuries leading up to the UK "Brexit" vote. The
vote to leave the European Union was a surprise to many, which led to another
bout of financial market turmoil. But cheaper equity and credit valuations were
quickly seized upon by those seeing opportunity. In particular, foreign bond
investors, pressured by low rates at home due to their central banks' monetary
policies, directed investment toward U.S. bond markets where yields were higher
outright as well as when swapped back to their local currency.
As the summer went on, volatility seemed to go on vacation along with many
market participants. But this did not mean markets were not changing. Money
market fund reform was the leading story in short-maturity markets and it
gathered momentum in the closing months of the reporting period. The much
discussed reforms to SEC rule 2a-7 regarding money market funds went into effect
on October 14, 2016. The pre-reform period saw a massive shift in the money fund
landscape as $1 trillion moved from prime funds to government-only funds in
order to avoid liquidity gates and fees, and the floating net asset values
("NAV") required of institutional prime funds. This migration had a significant
effect on money market rates purely based on lower demand for credit. Of note,
3-month LIBOR increased 27 basis points to 0.88% between the end of 2015 and
October 31, 2016. With the reforms now in effect, we believe the market will
begin working towards a post-reform equilibrium, both in the makeup of the money
fund universe and the level of front-end rates such as LIBOR.
PERFORMANCE ANALYSIS
For the 12-months ended October 31, 2016, the Fund's NAV and market price total
returns were 0.94% and 0.99%, respectively. These compare favorably to the 0.54%
total return for the BofA Merrill Lynch 0-1 Year U.S. Treasury Index (the
"Index") over the same period.
Due in part to the 0.25% rate hike by the Fed in December, the Fund's
distribution rate increased steadily over the 12-month period. The most recent
distribution was $0.06 per share, equal to a 1.20% rate on an annualized basis
to NAV.
Page 5
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
The Fund maintained a diversified portfolio of securities across its investment
universe with an emphasis on those with a very high level of liquidity. The Fund
primarily held corporate bonds, commercial paper and mortgage-backed securities.
Corporate floating rate notes mitigated interest rate risk while commercial
paper was used as the primary source for liquidity needs. Credit risk remained
low as the investment strategy focused on high quality, short-term holdings. The
Fund's weighted average maturity was kept around one year and weighted average
effective duration around one-quarter of a year.
The Fund benefited from positive security selection within corporate bonds,
commercial mortgage-backed securities (CMBS) and agency mortgage-backed
securities (MBS). The Fund employed a strategy that placed particular emphasis
on floating rate corporate bonds with maturity dates between one and three years
with a smaller allocation out to five years. Fund returns were enhanced by
investing a portion of its assets in high quality, higher yielding securities
such as CMBS and buying newly issued corporate floating rate notes. The use of
mortgage-backed securities to capture yield was an accretive strategy that also
enhanced Fund diversification. Capturing credit risk term premiums was also
accretive as returns from corporate securities maturing longer than one year
outperformed those maturing inside one year. The allocation to commercial paper
contributed to principal preservation and liquidity maintenance while adding
yield exceeding that found in Treasuries and repurchase agreements. The Fund
also benefited from a move higher in LIBOR levels after the Fed rate hike in
December and again mid-way through 2016 as an indirect effect from money market
fund reform. Three-month LIBOR moved from approximately 0.33% at the beginning
of the period to 0.88% at the end. This move higher positively impacted the
Fund's yield given its high allocation to floating rate coupons benchmarked to
LIBOR rates.
MARKET AND FUND OUTLOOK
Going forward, we expect macroeconomic data to warrant a rate hike from the Fed
in December 2016. We believe additional rate hikes in 2017 are not out of the
question although the slow pace of economic growth and a predisposed wariness on
the part of many Fed officials adds uncertainty to this outlook. Any further
rate hikes would likely be very gradual and would again serve as a welcome form
of additional yield for the Fund. We will continue to manage the strategy to
provide capital preservation and liquidity in the midst of gradually rising
rates and slow economic growth. Accordingly we expect to maintain a low exposure
to interest rate risk and to opportunistically allocate to parts of the yield
curve that we believe represent value compared to rate expectations.
With monetary policy from the ECB and the BoJ creating an environment for
negative interest rates in those markets, we expect flows from abroad to be very
supportive of the domestic high-grade bond market for some time. Although
corporate earnings growth may be flat in the near term, we believe the technical
tailwinds remain very positive for U.S. credit. While we acknowledge the
headwinds that these banks face (both foreign and domestic), we believe banks
today generally have robust capital and liquidity along with strong asset
quality. We believe that many issuers in the energy sector are taking the
necessary steps toward rightsizing their operations and see potential to
increase exposure to that sector. We look to maintain an underweight in
technology and healthcare - outside of the potential for attractive new issuance
- given the potential for further shareholder-friendly activities in those
sectors. Pharmaceutical companies also face significant political pressures to
slow the growth of drug prices. In mortgage-backed securities, healthy
residential and commercial real estate markets have been a firm fundamental
support for the sector. We foresee front-end MBS structures to continue offering
attractive yield capture opportunities and are biased toward adding agency
collateral securities rather than CMBS for relative valuation reasons.
Overall, we believe the backdrop is still constructive for spreads, but given
the significant improvement in valuations since the first quarter of 2016, the
magnitude of possible further improvement is likely to be lower. We see global
central bank policy shifts as the most significant risk to our view. With the
BoJ and the ECB both in the middle of evaluating future options for their
extraordinary monetary and QE policies, there is a heightened chance that the
market will experience additional periods of "risk-off" should the BoJ and ECB
be seen as once again failing to deliver additional support. Accordingly, future
bouts of volatility would not be a surprise to us and could provide
opportunities for attractive entry points.
Page 6
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust Enhanced Short Maturity ETF (the "Fund"), you
incur two types of costs: (1) transaction costs; and (2) ongoing costs,
including management fees, distribution and/or service fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
MAY 1, 2016 OCTOBER 31, 2016 PERIOD (a) PERIOD (b)
-------------------------------------------------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
Actual $1,000.00 $1,005.90 0.25% $1.26
Hypothetical (5% return before expenses) $1,000.00 $1,023.88 0.25% $1.27
(a) These expense ratios reflect expense waivers. See Note 3 in the Notes to
the Financial Statements.
(b) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (May 1,
2016 through October 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 7
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
ANNUALIZED
PRINCIPAL YIELD ON DATE STATED
VALUE DESCRIPTION OF PURCHASE MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
COMMERCIAL PAPER -- 35.5%
AEROSPACE/DEFENSE -- 0.7%
$ 3,000,000 Harris Corp.................................. 1.05% 11/10/16 $ 2,999,227
---------------
CHEMICALS -- 2.8%
2,000,000 Albemarle Corp............................... 1.38% 11/03/16 1,999,850
2,000,000 Albemarle Corp............................... 1.38% 11/21/16 1,998,499
2,000,000 Albemarle Corp............................... 1.38% 12/06/16 1,997,374
2,000,000 Albemarle Corp............................... 1.38% 12/13/16 1,996,850
2,000,000 Monsanto Co.................................. 1.07% 11/21/16 1,998,832
3,000,000 Monsanto Co.................................. 1.15% 11/22/16 2,998,040
---------------
12,989,445
---------------
DIVERSIFIED FINANCIAL SERVICES -- 1.7%
3,000,000 Hitachi Capital America Corp................. 1.07% 11/07/16 2,999,475
2,000,000 Hitachi Capital America Corp................. 1.02% 11/28/16 1,998,500
3,000,000 Volvo Treasury North America, L.P............ 0.84% 11/30/16 2,998,018
---------------
7,995,993
---------------
ELECTRONICS -- 1.8%
3,000,000 Arrow Electronics, Inc....................... 0.99% 11/03/16 2,999,838
2,175,000 Arrow Electronics, Inc....................... 1.09% 11/04/16 2,174,806
1,000,000 Arrow Electronics, Inc....................... 1.04% 11/09/16 999,773
2,000,000 Arrow Electronics, Inc....................... 1.09% 11/21/16 1,998,811
---------------
8,173,228
---------------
FOOD -- 1.0%
1,500,000 Kraft Heinz Foods Co......................... 0.92% 11/02/16 1,499,962
1,100,000 Kraft Heinz Foods Co......................... 0.92% 11/08/16 1,099,807
2,000,000 Kraft Heinz Foods Co......................... 0.90% 11/17/16 1,999,219
---------------
4,598,988
---------------
GAS -- 2.5%
2,000,000 NiSource Finance Corp........................ 1.07% 11/10/16 1,999,475
3,550,000 NiSource Finance Corp........................ 1.07% 11/17/16 3,548,343
2,000,000 NiSource Finance Corp........................ 1.02% 11/21/16 1,998,889
1,000,000 NiSource Finance Corp........................ 1.15% 12/15/16 998,631
3,000,000 Sempra Global................................ 0.89% 11/29/16 2,997,970
---------------
11,543,308
---------------
HEALTH CARE PRODUCTS -- 1.1%
2,000,000 Becton Dickinson and Co...................... 0.85% 11/28/16 1,998,755
3,000,000 Thermo Fisher Scientific, Inc................ 0.92% 11/01/16 3,000,000
---------------
4,998,755
---------------
HEALTH CARE SERVICES -- 1.1%
5,000,000 Humana, Inc.................................. 0.87% 11/22/16 4,997,520
---------------
HOME FURNISHINGS -- 0.7%
3,400,000 Whirlpool Corp............................... 0.92% 12/09/16 3,396,770
---------------
LODGING -- 1.8%
2,000,000 Wyndham Worldwide Corp....................... 0.92% - 1.10% 11/01/16 2,000,000
4,000,000 Wyndham Worldwide Corp....................... 1.02% - 1.28% 11/03/16 3,999,750
2,000,000 Wyndham Worldwide Corp....................... 1.10% 11/10/16 1,999,460
---------------
7,999,210
---------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
ANNUALIZED
PRINCIPAL YIELD ON DATE STATED
VALUE DESCRIPTION OF PURCHASE MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
COMMERCIAL PAPER (CONTINUED)
MEDIA -- 0.2%
$ 1,000,000 Viacom, Inc.................................. 1.07% 11/09/16 $ 999,767
---------------
MISCELLANEOUS MANUFACTURING -- 2.9%
1,176,000 ITT, Inc..................................... 1.04% 11/16/16 1,175,500
3,000,000 ITT, Inc..................................... 1.02% 11/22/16 2,998,250
560,000 Pentair Finance S.A.......................... 1.23% 11/01/16 560,000
429,000 Pentair Finance S.A.......................... 1.43% 11/02/16 428,983
2,000,000 Pentair Finance S.A.......................... 1.43% 11/08/16 1,999,455
2,000,000 Pentair Finance S.A.......................... 1.23% 11/09/16 1,999,467
2,000,000 Pentair Finance S.A.......................... 1.28% 11/14/16 1,999,097
2,000,000 Textron, Inc................................. 0.92% 12/05/16 1,998,300
---------------
13,159,052
---------------
OIL & GAS -- 4.1%
2,000,000 Canadian Natural Resources Ltd............... 1.23% - 1.33% 11/08/16 1,999,513
2,000,000 Canadian Natural Resources Ltd............... 1.41% 11/15/16 1,998,926
2,000,000 Canadian Natural Resources Ltd............... 1.38% 11/17/16 1,998,800
2,000,000 Canadian Natural Resources Ltd............... 1.38% 12/07/16 1,997,300
3,000,000 Eni Finance USA, Inc......................... 1.06% 01/19/17 2,993,152
2,000,000 Nabors Industries, Inc....................... 1.18% 11/01/16 2,000,000
4,000,000 Nabors Industries, Inc....................... 1.23% 11/07/16 3,999,200
2,000,000 Suncor Energy, Inc........................... 1.12% 11/22/16 1,998,727
---------------
18,985,618
---------------
OIL & GAS SERVICES -- 0.7%
3,000,000 FMC Technologies, Inc........................ 1.07% 01/18/17 2,993,174
---------------
PIPELINES -- 10.7%
2,000,000 Enbridge Energy Partners, L.P................ 1.35% 11/08/16 1,999,486
3,000,000 Enbridge Energy Partners, L.P................ 1.26% 11/14/16 2,998,667
2,000,000 Enbridge Energy Partners, L.P................ 1.36% 11/16/16 1,998,891
3,000,000 Enbridge US, Inc............................. 0.90% 11/07/16 2,999,560
3,000,000 Energy Transfer Partners, L.P................ 1.23% 11/03/16 2,999,801
3,000,000 Energy Transfer Partners, L.P................ 1.33% 11/10/16 2,999,025
4,000,000 Enterprise Products Operating LLC............ 0.88% 11/14/16 3,998,757
2,000,000 ONEOK Partners, L.P.......................... 1.13% 11/04/16 1,999,817
2,000,000 ONEOK Partners, L.P.......................... 1.13% 11/10/16 1,999,450
3,000,000 ONEOK Partners, L.P.......................... 1.13% 11/16/16 2,998,624
1,000,000 ONEOK Partners, L.P.......................... 1.13% 12/07/16 998,900
4,000,000 Plains All American Pipeline, L.P............ 1.38% 11/08/16 3,998,950
2,000,000 Plains Midstream Canada ULC.................. 1.38% 11/14/16 1,999,025
2,000,000 Plains Midstream Canada ULC.................. 1.38% 11/16/16 1,998,875
3,500,000 Spectra Energy Partners, L.P................. 0.90% 11/07/16 3,499,486
2,500,000 Spectra Energy Partners, L.P................. 0.92% 11/09/16 2,499,500
2,000,000 Spectra Energy Partners, L.P................. 0.92% 12/08/16 1,998,150
1,900,000 Sunoco Logistics Partners Operations, L.P.... 1.07% 11/07/16 1,899,667
3,000,000 Williams Partners, L.P....................... 0.94% 11/01/16 3,000,000
---------------
48,884,631
---------------
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
ANNUALIZED
PRINCIPAL YIELD ON DATE STATED
VALUE DESCRIPTION OF PURCHASE MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
COMMERCIAL PAPER (CONTINUED)
RETAIL -- 1.7%
$ 3,000,000 AutoNation, Inc.............................. 0.97% 11/01/16 $ 3,000,001
3,000,000 AutoNation, Inc.............................. 1.07% 11/10/16 2,999,212
2,000,000 AutoNation, Inc.............................. 1.12% 11/15/16 1,999,144
---------------
7,998,357
---------------
TOTAL COMMERCIAL PAPER.................................................... 162,713,043
(Cost $162,713,043) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS -- 34.0%
AEROSPACE/DEFENSE -- 0.4%
1,715,000 United Technologies Corp. (a)................ 1.24% 11/01/19 1,716,797
---------------
AGRICULTURE -- 0.2%
985,000 Reynolds American, Inc....................... 2.30% 08/21/17 993,079
---------------
AIRLINES -- 0.4%
1,745,000 Southwest Airlines Co........................ 5.75% 12/15/16 1,754,243
---------------
AUTO MANUFACTURERS -- 5.3%
330,000 American Honda Finance Corp.,
Medium-Term Note (a)...................... 1.34% 07/13/18 331,177
1,000,000 American Honda Finance Corp.,
Medium-Term Note (a)...................... 1.64% 02/22/19 1,012,391
250,000 Daimler Finance North America LLC (a) (b).... 1.20% 03/10/17 250,187
1,200,000 Daimler Finance North America LLC (a) (b).... 1.10% 08/01/17 1,200,943
3,000,000 Daimler Finance North America LLC (a) (b).... 1.51% 10/30/19 3,005,073
2,000,000 Ford Motor Credit Co. LLC, (a)............... 1.48% 03/27/17 2,000,670
3,600,000 Ford Motor Credit Co. LLC,
Medium-Term Note (a)...................... 1.66% 01/17/17 3,603,964
1,000,000 Ford Motor Credit Co. LLC,
Medium-Term Note (a)...................... 2.46% 01/08/19 1,017,825
1,022,000 General Motors Financial Co., Inc............ 2.63% 07/10/17 1,030,381
500,000 General Motors Financial Co., Inc. (a)....... 2.94% 01/15/19 511,395
2,000,000 General Motors Financial Co., Inc. (a)....... 2.13% 10/04/19 2,012,346
1,500,000 Nissan Motor Acceptance Corp. (a) (b)........ 1.38% 09/13/19 1,499,858
500,000 Toyota Motor Credit Corp.,
Medium-Term Note (a).................... 1.24% 04/06/18 500,969
800,000 Toyota Motor Credit Corp.,
Medium-Term Note (a).................... 1.63% 02/19/19 810,168
1,000,000 Toyota Motor Credit Corp.,
Medium-Term Note (a).................... 1.32% 10/18/19 1,003,298
4,000,000 Volkswagen Group of America Finance LLC
(a) (b)................................. 1.09% 11/22/16 4,000,568
675,000 Volkswagen Group of America Finance LLC (b).. 1.25% 05/23/17 673,750
---------------
24,464,963
---------------
BANKS -- 12.0%
1,000,000 Bank of America Corp......................... 5.42% 03/15/17 1,015,156
1,800,000 Bank of America Corp......................... 3.88% 03/22/17 1,819,373
296,000 Bank of America Corp. (a).................... 1.92% 01/15/19 298,139
1,030,000 Bank of America Corp., Medium-Term Note (a).. 1.44% 08/25/17 1,031,395
1,301,000 Bank of America Corp., Medium-Term Note (a).. 1.94% 03/22/18 1,312,278
800,000 Bank of America Corp., Global
Medium-Term Note.......................... 6.40% 08/28/17 832,297
1,630,000 Bank of America N.A. (a)..................... 1.29% 02/14/17 1,632,111
1,000,000 Bank of New York Mellon (The) Corp.,
Medium-Term Note (a)...................... 1.67% 08/17/20 1,013,777
3,575,000 BB&T Corp., Medium-Term Note (a)............. 1.71% 06/15/18 3,600,422
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS (CONTINUED)
BANKS (CONTINUED)
$ 1,000,000 Branch Banking & Trust Co.,
Medium-Term Note (a)...................... 1.29% 05/01/19 $ 1,001,880
2,625,000 Capital One N.A./Mclean VA (a)............... 1.46% 02/05/18 2,627,985
285,000 Capital One N.A./Mclean VA (a)............... 1.62% 09/13/19 285,553
400,000 Citigroup, Inc............................... 1.30% 11/15/16 400,003
1,400,000 Citigroup, Inc. (a).......................... 1.39% 03/10/17 1,401,030
1,140,000 Citigroup, Inc. (a).......................... 1.28% 05/01/17 1,140,942
1,000,000 Citigroup, Inc. (a).......................... 1.58% 04/27/18 1,002,217
1,000,000 Citigroup, Inc. (a).......................... 2.52% 05/15/18 1,017,639
1,500,000 Citigroup, Inc. (a).......................... 1.76% 06/07/19 1,507,453
1,000,000 Citigroup, Inc. (a).......................... 1.95% 08/02/21 1,008,023
1,500,000 Fifth Third Bank/Cincinnati OH (a)........... 1.44% 09/27/19 1,502,070
1,500,000 Goldman Sachs Group, (The), Inc. (a)......... 1.48% 05/22/17 1,502,366
1,000,000 Goldman Sachs Group, (The), Inc. (a)......... 2.09% 04/30/18 1,009,477
1,500,000 Goldman Sachs Group, (The), Inc. (a)......... 1.92% 04/25/19 1,510,470
1,000,000 Goldman Sachs Group, (The), Inc. (a)......... 2.04% 04/23/20 1,006,365
3,000,000 Goldman Sachs Group, (The), Inc., Medium-Term
Note (a).................................. 1.46% 06/04/17 3,004,506
2,450,000 JPMorgan Chase & Co. (a)..................... 1.34% 02/15/17 2,452,616
500,000 JPMorgan Chase & Co. (a)..................... 1.78% 01/25/18 502,852
500,000 JPMorgan Chase & Co. (a)..................... 1.71% 03/22/19 504,118
1,000,000 JPMorgan Chase Bank N.A. (a)................. 1.31% 09/21/18 1,000,916
1,500,000 JPMorgan Chase Bank N.A. (a)................. 1.45% 09/23/19 1,502,703
1,021,000 KeyBank N.A. (a)............................. 1.32% 11/25/16 1,021,389
1,850,000 Morgan Stanley............................... 4.75% 03/22/17 1,876,655
3,000,000 Morgan Stanley (a)........................... 1.73% 01/24/19 3,015,783
1,510,000 Morgan Stanley, Global Medium-Term Note (a).. 2.16% 04/25/18 1,526,365
325,000 National City Bank/Cleveland OH (a).......... 1.20% 06/07/17 325,029
800,000 PNC Bank N.A. (a)............................ 1.06% 08/01/17 800,082
1,700,000 US Bank N.A./Cincinnati OH,
Medium-Term Note (a)...................... 1.47% 01/29/18 1,706,020
1,605,000 Wachovia Corp. (a)........................... 1.12% 06/15/17 1,605,748
1,500,000 Wells Fargo & Co., Medium-Term Note (a)...... 1.57% 01/30/20 1,497,909
1,500,000 Wells Fargo Bank N.A. (a).................... 1.38% 09/07/17 1,503,939
500,000 Wells Fargo Bank N.A. Medium-Term Note (a)... 1.62% 01/22/18 502,542
---------------
54,827,593
---------------
BEVERAGES -- 1.6%
1,400,000 Anheuser-Busch InBev Finance, Inc. (a)....... 2.02% 02/01/21 1,436,400
936,000 Molson Coors Brewing Co...................... 2.00% 05/01/17 939,904
2,500,000 PepsiCo, Inc. (a)............................ 1.13% 10/04/19 2,501,580
2,500,000 SABMiller Holdings, Inc. (b)................. 2.45% 01/15/17 2,507,365
---------------
7,385,249
---------------
BIOTECHNOLOGY -- 0.9%
4,000,000 Amgen, Inc. (a).............................. 1.19% 05/22/17 4,005,892
---------------
CHEMICALS -- 0.3%
1,530,000 Monsanto Co. (a)............................. 0.99% 11/07/16 1,530,052
---------------
COMPUTERS -- 0.2%
950,000 Hewlett Packard Enterprise Co. (a) (b)....... 2.85% 10/05/17 958,820
---------------
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES -- 1.9%
$ 800,000 American Express Co. (a)..................... 1.40% 05/22/18 $ 802,178
500,000 American Express Credit Corp. (a)............ 1.41% 03/18/19 501,344
2,199,000 American Express Credit Corp.,
Medium-Term Note (a)...................... 1.11% 06/05/17 2,201,216
500,000 American Express Credit Corp.,
Medium-Term Note.......................... 1.13% 06/05/17 500,325
2,000,000 American Express Credit Corp.,
Medium-Term Note (a)...................... 1.46% 10/30/19 2,003,238
361,000 Bear Stearns Cos. LLC (The).................. 5.55% 01/22/17 364,605
1,000,000 Synchrony Financial.......................... 1.88% 08/15/17 1,002,611
1,500,000 Synchrony Financial (a)...................... 2.19% 11/09/17 1,510,817
---------------
8,886,334
---------------
ELECTRIC -- 1.7%
350,000 American Electric Power Co., Inc............. 1.65% 12/15/17 351,001
299,000 CMS Energy Corp.............................. 6.55% 07/17/17 310,135
2,500,000 Duke Energy Corp. (a)........................ 1.23% 04/03/17 2,504,055
1,500,000 Exelon Corp.................................. 1.55% 06/09/17 1,501,502
1,000,000 Nextera Energy Capital Holdings, Inc......... 2.06% 09/01/17 1,005,896
1,000,000 Pacific Gas & Electric Co.................... 5.63% 11/30/17 1,046,097
1,000,000 Southern (The) Co............................ 1.30% 08/15/17 1,000,712
---------------
7,719,398
---------------
ELECTRONICS -- 0.1%
250,000 Honeywell International, Inc. (a)............ 1.17% 10/30/19 250,185
---------------
FOOD -- 0.7%
2,580,000 Kraft Heinz Foods Co......................... 1.60% 06/30/17 2,585,760
120,000 Kroger (The) Co.............................. 6.40% 08/15/17 124,706
500,000 Mondelez International, Inc. (a)............. 1.28% 02/01/19 500,137
---------------
3,210,603
---------------
HEALTH CARE PRODUCTS -- 0.3%
1,400,000 Medtronic, Inc. (a).......................... 1.65% 03/15/20 1,419,128
---------------
HEALTH CARE SERVICES -- 1.2%
2,000,000 Aetna, Inc. (a).............................. 1.49% 12/08/17 2,009,052
3,400,000 UnitedHealth Group, Inc. (a)................. 1.33% 01/17/17 3,403,257
---------------
5,412,309
---------------
HOUSEWARES -- 0.4%
2,068,000 Newell Brands, Inc........................... 2.05% 12/01/17 2,080,772
---------------
INSURANCE -- 0.4%
1,351,000 Prudential Financial, Inc.,
Medium-Term Note (a)...................... 1.60% 08/15/18 1,348,894
526,000 Reinsurance Group of America, Inc............ 5.63% 03/15/17 534,066
---------------
1,882,960
---------------
MEDIA -- 0.4%
2,000,000 Time Warner Cable LLC........................ 5.85% 05/01/17 2,044,652
---------------
OIL & GAS -- 0.9%
1,000,000 Anadarko Petroleum Corp...................... 6.38% 09/15/17 1,042,222
435,000 Chevron Corp. (a)............................ 1.01% 03/02/18 434,967
1,500,000 Chevron Corp. (a)............................ 1.32% 05/16/18 1,506,781
500,000 ConocoPhillips Co............................ 1.05% 12/15/17 497,561
500,000 Exxon Mobil Corp. (a)........................ 1.62% 03/01/19 504,872
---------------
3,986,403
---------------
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS (CONTINUED)
OIL & GAS SERVICES -- 0.1%
$ 255,000 Cameron International Corp................... 1.15% 12/15/16 $ 255,049
---------------
PHARMACEUTICALS -- 0.5%
1,500,000 AbbVie, Inc.................................. 1.75% 11/06/17 1,505,730
1,000,000 Mylan, Inc................................... 1.35% 11/29/16 1,000,215
---------------
2,505,945
---------------
PIPELINES -- 0.6%
1,000,000 Enterprise Products Operating LLC............ 6.30% 09/15/17 1,041,516
1,125,000 Kinder Morgan Energy Partners L.P............ 6.00% 02/01/17 1,136,828
475,000 Plains All American Pipeline, L.P. /PAA
Finance Corp.............................. 6.13% 01/15/17 479,149
---------------
2,657,493
---------------
RETAIL -- 0.2%
1,000,000 Lowe's Cos., Inc. (a)........................ 1.12% 04/15/19 999,637
---------------
SOFTWARE -- 0.1%
523,000 Oracle Corp. (a)............................. 1.39% 10/08/19 526,816
---------------
TELECOMMUNICATIONS -- 2.4%
3,700,000 AT&T, Inc. (a)............................... 1.26% 03/30/17 3,703,789
950,000 AT&T, Inc. (a)............................... 1.74% 11/27/18 959,562
1,215,000 Cisco Systems, Inc. (a)...................... 1.41% 02/21/18 1,222,509
1,900,000 Verizon Communications, Inc. (a)............. 1.23% 06/09/17 1,903,443
2,000,000 Verizon Communications, Inc. (a)............. 1.63% 06/17/19 2,018,169
1,000,000 Verizon Communications, Inc. (a)............. 1.13% 08/15/19 998,009
---------------
10,805,481
---------------
TRUCKING & LEASING -- 0.8%
3,500,000 Penske Truck Leasing Co. L.P. / PTL
Finance Corp. (b)......................... 3.75% 05/11/17 3,542,959
---------------
TOTAL CORPORATE BONDS..................................................... 155,822,812
(Cost $155,525,523) ---------------
FOREIGN CORPORATE BONDS -- 14.5%
AUTO MANUFACTURERS -- 0.2%
1,045,000 Volkswagen International Finance N.V. (b).... 1.13% 11/18/16 1,045,063
---------------
BANKS -- 10.4%
1,000,000 ABN AMRO Bank N.V. (b)....................... 4.25% 02/02/17 1,008,210
1,000,000 Bank of Montreal, Medium-Term Note........... 2.50% 01/11/17 1,003,103
900,000 Bank of Montreal, Medium-Term Note (a)....... 1.48% 04/09/18 901,983
500,000 Bank of Montreal, Medium-Term Note (a)....... 1.53% 07/18/19 501,162
1,000,000 Bank of Montreal, Medium-Term Note (a)....... 1.62% 08/27/21 1,003,514
500,000 Bank of Nova Scotia (The) (a)................ 1.19% 04/11/17 500,327
250,000 Bank of Nova Scotia (The) (a)................ 1.71% 01/15/19 251,917
1,000,000 Bank of Tokyo-Mitsubishi UFJ Ltd. (The) (b).. 1.20% 03/10/17 1,000,154
1,000,000 Barclays Bank PLC (a)........................ 1.38% 02/17/17 1,001,135
1,025,000 BNP Paribas S.A., Medium-Term Note (a)....... 1.44% 12/12/16 1,025,836
500,000 Canadian Imperial Bank of Commerce/Canada
(a)....................................... 1.36% 09/06/19 500,490
2,000,000 Commonwealth Bank of Australia (a) (b)....... 1.52% 11/07/19 2,002,648
2,500,000 Credit Suisse AG/New York, NY,
Global Medium-Term Note (a)............... 1.32% 05/26/17 2,500,525
2,500,000 Credit Suisse AG/New York, NY,
Global Medium-Term Note (a)............... 1.58% 01/29/18 2,504,689
See Notes to Financial Statements Page 13
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
FOREIGN CORPORATE BONDS (CONTINUED)
BANKS (CONTINUED)
$ 2,000,000 Danske Bank A/S (a) (b)...................... 1.42% 09/06/19 $ 2,003,082
65,000 Deutsche Bank AG/London (a).................. 1.43% 02/13/17 64,804
500,000 HSBC Bank PLC (a) (b)........................ 1.46% 05/15/18 500,237
1,000,000 HSBC Holdings PLC (a)........................ 2.36% 01/05/22 1,005,267
1,475,000 ING Bank N.V. (b)............................ 3.75% 03/07/17 1,487,533
2,000,000 ING Bank N.V. (a) (b)........................ 1.43% 08/15/19 1,999,010
800,000 Macquarie Bank Ltd. (a) (b).................. 1.65% 03/24/17 801,183
1,500,000 Mitsubishi UFJ Financial Group, Inc. (a)..... 1.91% 09/13/21 1,503,614
1,500,000 Mizuho Bank Ltd. (a) (b)..................... 1.31% 04/16/17 1,501,061
500,000 Mizuho Bank Ltd. (a) (b)..................... 2.07% 10/20/18 502,933
1,800,000 Nordea Bank AB (a) (b)....................... 1.21% 04/04/17 1,801,303
1,830,000 Nordea Bank AB (a) (b)....................... 1.70% 09/17/18 1,842,940
300,000 Royal Bank of Canada, Global Medium-Term Note
(a)....................................... 1.14% 10/13/17 300,163
500,000 Royal Bank of Canada, Global Medium-Term Note
(a)....................................... 1.59% 04/15/19 502,264
1,000,000 Royal Bank of Canada, Global Medium-Term Note
(a)....................................... 1.37% 07/29/19 1,003,096
1,067,000 Santander UK PLC............................. 1.38% 03/13/17 1,066,577
1,500,000 Skandinaviska Enskilda Banken AB (a) (b)..... 1.42% 09/13/19 1,501,956
1,500,000 Standard Chartered PLC (a) (b)............... 1.94% 08/19/19 1,510,395
800,000 Svenska Handelsbanken AB..................... 2.88% 04/04/17 806,258
1,000,000 Svenska Handelsbanken AB, Medium-Term Note
(a)....................................... 1.33% 09/06/19 1,001,545
1,000,000 Swedbank AB (b).............................. 2.13% 09/29/17 1,006,096
1,000,000 Toronto-Dominion Bank (The), Medium-Term Note
(a)....................................... 1.44% 04/30/18 1,002,827
850,000 UBS AG/Stanford CT (a)....................... 1.40% 06/01/17 851,193
225,000 UBS AG/Stanford CT........................... 5.88% 12/20/17 235,913
3,850,000 UBS AG/Stanford CT, Global Medium-Term Note
(a)....................................... 1.56% 03/26/18 3,865,947
1,950,000 Westpac Banking Corp. (a)................... 1.26% 05/25/18 1,948,792
350,000 Westpac Banking Corp. (a)................... 1.53% 05/13/19 351,733
---------------
47,673,415
---------------
DIVERSIFIED FINANCIAL SERVICES -- 0.2%
820,000 Macquarie Group Ltd. (a) (b)................ 1.89% 01/31/17 821,191
---------------
FOOD -- 0.3%
1,500,000 Mondelez International Holdings Netherlands
BV (a) (b)................................ 1.50% 10/28/19 1,503,314
---------------
MISCELLANEOUS MANUFACTURING -- 0.7%
3,000,000 Siemens Financieringsmaatschappij N.V.
(a) (b)................................... 1.17% 09/13/19 3,003,054
---------------
OIL & GAS -- 1.4%
1,500,000 BP Capital Markets PLC....................... 2.25% 11/01/16 1,500,000
175,000 BP Capital Markets PLC (a)................... 1.16% 02/10/17 175,018
800,000 BP Capital Markets PLC....................... 1.85% 05/05/17 802,885
1,000,000 BP Capital Markets PLC (a)................... 1.49% 09/26/18 1,004,897
500,000 BP Capital Markets PLC (a)................... 1.72% 09/16/21 502,406
2,017,000 Shell International Finance BV (a)........... 1.13% 05/10/17 2,019,410
479,000 Total Capital International S.A. (a)......... 1.38% 08/10/18 480,283
---------------
6,484,899
---------------
PHARMACEUTICALS -- 1.1%
2,750,000 Actavis Funding SCS.......................... 1.85% 03/01/17 2,756,652
2,100,000 Actavis Funding SCS (a)...................... 1.93% 03/12/18 2,119,381
---------------
4,876,033
---------------
Page 14 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
FOREIGN CORPORATE BONDS (CONTINUED)
PIPELINES -- 0.0%
$ 50,000 Enbridge, Inc. (a)........................... 1.29% 06/02/17 $ 49,945
---------------
TELECOMMUNICATIONS -- 0.2%
1,000,000 Deutsche Telekom International Finance BV
(a) (b)................................... 1.31% 09/19/19 1,001,621
---------------
TOTAL FOREIGN CORPORATE BONDS............................................. 66,458,535
(Cost $66,390,897) ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 10.1%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.3%
Federal Home Loan Banks
143,782 Series 2008-1372, Class 1................. 4.75% 05/18/18 150,320
Federal Home Loan Mortgage Corporation
59,185 Series 2002-2510, Class HB................ 5.50% 10/15/17 60,137
36,890 Series 2002-2538, Class CB................ 5.00% 12/15/17 37,478
32,320 Series 2002-2542, Class ES................ 5.00% 12/15/17 32,864
181,939 Series 2003-2595, Class AE................ 5.00% 04/15/18 185,321
822,383 Series 2003-2614, Class BY................ 4.50% 05/15/18 839,154
121,330 Series 2003-2629, Class AD................ 4.50% 06/15/18 124,688
106,735 Series 2003-2656, Class BG................ 5.00% 10/15/32 108,235
41,446 Series 2003-2672, Class NH................ 4.00% 09/15/18 42,135
676,952 Series 2004-2764, Class UE................ 5.00% 10/15/32 694,739
183,729 Series 2004-2773, Class HS................ 4.50% 04/15/19 188,814
99,918 Series 2004-2804, Class VC................ 5.00% 07/15/21 102,553
273,977 Series 2004-2828, Class JE................ 4.50% 07/15/19 283,588
152,748 Series 2004-2861, Class BL................ 4.00% 09/15/19 156,506
32,691 Series 2004-2874, Class BC................ 5.00% 10/15/19 33,883
865,457 Series 2004-2895, Class EK................ 4.00% 11/15/19 890,087
117,083 Series 2005-2920, Class HD................ 4.50% 01/15/20 120,380
101,735 Series 2005-2945, Class HB................ 5.00% 03/15/20 105,710
237,274 Series 2005-2981, Class BC................ 4.50% 05/15/20 243,852
350,164 Series 2005-2995, Class JK................ 4.50% 06/15/20 358,857
30,316 Series 2005-3005, Class GA................ 4.50% 02/15/20 30,921
92,153 Series 2005-3064, Class OG................ 5.50% 06/15/34 93,604
732,288 Series 2007-3266, Class D................. 5.00% 01/15/22 756,792
131,340 Series 2007-3294, Class DB................ 4.50% 03/15/22 135,724
11,149 Series 2009-3536, Class P................. 3.00% 02/15/38 11,153
58,689 Series 2010-3641, Class TK................ 4.50% 01/15/38 58,865
398,173 Series 2010-3659, Class EB................ 2.00% 06/15/18 399,843
280,230 Series 2010-3705, Class CA................ 3.00% 08/15/20 285,560
480,508 Series 2010-3726, Class DA................ 2.00% 08/15/20 482,972
1,788,222 Series 2010-3740, Class NP................ 2.00% 01/15/37 1,799,020
188,329 Series 2010-3766, Class HE................ 3.00% 11/15/20 192,387
837,207 Series 2010-3768, Class DE................ 2.25% 11/15/28 841,140
1,859,343 Series 2010-3770, Class EB................ 2.00% 01/15/38 1,872,099
221,973 Series 2010-3772, Class HE................ 2.50% 10/15/18 224,014
213,763 Series 2010-3773, Class GK................ 2.50% 12/15/20 217,367
404,285 Series 2011-3790, Class AP................ 4.50% 01/15/37 424,469
37,657 Series 2011-3794, Class JH................ 3.50% 12/15/23 37,847
285,389 Series 2011-3812, Class BE................ 2.75% 09/15/18 288,875
225,867 Series 2011-3814, Class KE................ 2.25% 02/15/18 226,829
See Notes to Financial Statements Page 15
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corporation (Continued)
$ 397,200 Series 2011-3820, Class NA................ 4.50% 02/15/38 $ 412,977
153,828 Series 2011-3821, Class A................. 4.00% 01/15/29 157,769
802,406 Series 2011-3825, Class AB................ 3.00% 08/15/20 814,146
29,393 Series 2011-3826, Class MB................ 1.50% 07/15/18 29,456
120,010 Series 2011-3841, Class JK................ 3.00% 10/15/38 122,892
83,957 Series 2011-3848, Class GA................ 4.00% 12/15/28 85,224
350,786 Series 2011-3895, Class CD................ 2.00% 10/15/18 353,183
85,416 Series 2011-3977, Class GA................ 1.50% 07/15/19 85,588
1,070,764 Series 2012-4011, Class KM................ 2.00% 03/15/22 1,082,712
248,627 Series 2014-4305, Class KN................ 2.50% 03/15/38 252,142
1,184,088 Series 2014-4419, Class TB................ 3.00% 02/15/40 1,192,882
2,119,095 Series 2015-4459, Class NC................ 5.00% 07/15/25 2,175,376
Federal National Mortgage Association
66 Series 2001-69, Class OG.................. 5.50% 12/25/16 66
79,115 Series 2003-44, Class CD.................. 3.50% 03/25/33 79,849
130,631 Series 2003-81, Class HC.................. 4.75% 09/25/18 133,911
55,440 Series 2003-120, Class BY................. 4.00% 12/25/18 56,492
70,239 Series 2004-27, Class HB.................. 4.00% 05/25/19 71,886
208,476 Series 2004-79, Class FA (a).............. 0.82% 08/25/32 208,522
1,042,331 Series 2004-90, Class XQ.................. 4.50% 09/25/34 1,074,831
15,158 Series 2005-110, Class GK................. 5.50% 08/25/34 15,650
142,023 Series 2008-18, Class HD.................. 4.00% 12/25/18 144,520
57,957 Series 2008-51, Class BC.................. 4.50% 06/25/23 59,224
224,134 Series 2008-53, Class CA.................. 5.00% 07/25/23 233,062
106,547 Series 2009-11, Class DK.................. 5.00% 12/25/18 109,004
1,383,722 Series 2009-14, Class EB.................. 4.50% 03/25/24 1,424,021
233,304 Series 2009-31, Class 1A.................. 4.00% 02/25/24 236,171
446,329 Series 2009-78, Class LE.................. 4.00% 09/25/19 454,453
94,575 Series 2009-96, Class JA.................. 3.50% 10/25/24 97,100
137,645 Series 2010-10, Class NB.................. 3.00% 01/25/39 139,169
87,109 Series 2010-12, Class AC.................. 2.50% 12/25/18 87,774
45,770 Series 2010-39, Class PD.................. 3.00% 06/25/38 45,833
251,229 Series 2010-81, Class LE.................. 3.00% 07/25/39 253,984
254,747 Series 2010-83, Class AJ.................. 2.75% 11/25/18 257,350
190,614 Series 2010-103, Class GA................. 2.00% 04/25/20 190,745
274,474 Series 2010-110, Class AE................. 9.75% 11/25/18 289,764
988,319 Series 2010-116, Class AD................. 2.00% 08/25/20 996,272
70,755 Series 2010-123, Class HA................. 2.50% 03/25/24 71,267
343,242 Series 2010-144, Class YG................. 2.25% 11/25/23 345,244
544,473 Series 2010-145, Class MA................. 2.00% 12/25/20 549,097
63,508 Series 2010-153, Class AC................. 2.00% 11/25/18 63,917
721,228 Series 2011-3, Class EG................... 2.00% 05/25/20 725,717
436,053 Series 2011-13, Class AD.................. 2.00% 07/25/21 440,592
6,001 Series 2011-15, Class AB.................. 9.75% 08/25/19 6,341
290,025 Series 2011-33, Class PA.................. 4.50% 02/25/38 292,197
3,016,850 Series 2011-36, Class QC.................. 3.00% 12/25/28 3,071,346
89,902 Series 2011-68, Class AH.................. 4.50% 12/25/20 92,611
51,274 Series 2011-89, Class LE.................. 3.00% 03/25/39 52,038
974,237 Series 2011-111, Class DA................. 3.00% 12/25/38 993,681
Page 16 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Government National Mortgage Association
$ 112,614 Series 2000-9, Class FG (a)............... 1.13% 02/16/30 $ 113,563
185,195 Series 2005-78, Class A................... 5.00% 07/16/33 191,998
22,127 Series 2005-98, Class DA.................. 5.50% 12/20/34 22,387
228,955 Series 2006-17, Class KY.................. 5.00% 04/20/36 235,474
211,853 Series 2009-10, Class JA.................. 4.50% 03/16/34 217,016
261,218 Series 2009-43, Class AB.................. 5.00% 03/16/34 268,589
68,124 Series 2009-55, Class HC.................. 3.50% 06/20/39 68,922
358,154 Series 2009-77, Class KC.................. 4.50% 05/20/38 368,675
187,593 Series 2009-87, Class BD.................. 3.00% 10/20/38 190,105
49,878 Series 2009-113, Class MJ................. 4.00% 03/16/23 50,259
23,309 Series 2009-118, Class AW................. 3.00% 05/20/37 23,357
215,784 Series 2009-121, Class NG................. 3.50% 04/20/37 216,283
82,442 Series 2010-2, Class PM................... 4.50% 06/20/37 83,133
39,954 Series 2010-23, Class LA.................. 3.00% 10/20/37 40,424
134,129 Series 2010-30, Class PN.................. 4.00% 03/20/38 136,937
332,943 Series 2010-30, Class QA.................. 3.00% 06/20/38 336,711
359,579 Series 2010-30, Class QC.................. 3.50% 06/20/38 363,887
82,941 Series 2010-39, Class ME.................. 4.00% 03/20/38 84,558
255,203 Series 2010-39, Class MG.................. 4.25% 03/20/38 261,029
69,684 Series 2010-43, Class AP.................. 5.00% 09/20/37 70,503
196,879 Series 2010-45, Class HJ.................. 4.00% 05/16/35 199,793
142,858 Series 2010-45, Class KA.................. 2.50% 05/16/35 143,534
1,198,738 Series 2010-45, Class YM.................. 3.50% 05/16/35 1,214,246
354,846 Series 2010-57, Class YH.................. 2.50% 05/20/37 357,219
299,578 Series 2010-85, Class NK.................. 3.25% 01/20/38 305,291
206,703 Series 2010-87, Class HE.................. 3.00% 11/20/38 211,418
136,126 Series 2010-94, Class PH.................. 3.00% 12/20/37 137,518
149,411 Series 2010-101, Class PL................. 3.50% 04/20/38 151,454
730,386 Series 2010-114, Class NJ................. 3.00% 04/20/38 740,553
434,633 Series 2010-125, Class TE................. 3.00% 06/20/39 444,666
686,061 Series 2010-142, Class AJ................. 3.00% 09/20/39 696,139
112,056 Series 2010-164, Class GN................. 4.00% 07/20/35 112,735
35,830 Series 2010-167, Class CT................. 4.25% 09/20/33 36,007
198,057 Series 2011-21, Class AP.................. 4.50% 05/20/38 203,796
1,018,969 Series 2014-180, Class PA................. 2.50% 04/20/43 1,028,091
---------------
42,593,100
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.0%
Government National Mortgage Association
27,845 Series 2014-28, Class A................... 2.00% 01/16/46 27,869
---------------
PASS-THROUGH SECURITIES -- 0.8%
Federal Home Loan Mortgage Corporation
16,371 Pool B18688............................... 5.00% 02/01/20 17,102
76,227 Pool E01591............................... 5.50% 02/01/19 78,840
8,438 Pool E99249............................... 5.50% 09/01/18 8,634
97,754 Pool E99582............................... 5.00% 09/01/18 100,521
274,748 Pool G11728............................... 5.50% 02/01/20 286,701
148,107 Pool G11777............................... 5.00% 10/01/20 155,118
121,610 Pool G11879............................... 5.00% 10/01/20 127,596
See Notes to Financial Statements Page 17
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal Home Loan Mortgage Corporation (Continued)
$ 364,019 Pool G11966............................... 5.50% 11/01/20 $ 384,356
17,992 Pool G12255............................... 5.50% 07/01/21 19,284
4,032 Pool G12631............................... 5.50% 04/01/17 4,052
149,305 Pool G13204............................... 6.00% 11/01/22 160,880
126,784 Pool G13235............................... 4.50% 08/01/20 131,331
138,927 Pool G18010............................... 5.50% 09/01/19 145,239
Federal National Mortgage Association
325,796 Pool J02535............................... 5.00% 09/01/20 342,542
24,554 Pool 256889............................... 5.50% 09/01/17 24,776
19,021 Pool 723399............................... 4.50% 09/01/18 19,543
101,344 Pool 725445............................... 4.50% 05/01/19 104,697
108,129 Pool 725793............................... 5.50% 09/01/19 112,201
137,538 Pool 725934............................... 5.00% 11/01/19 142,125
308,254 Pool 735646............................... 4.50% 07/01/20 319,320
43,087 Pool 739798............................... 4.50% 09/01/18 44,327
175,373 Pool 773440............................... 5.00% 07/01/19 181,324
26,194 Pool 775019............................... 4.50% 05/01/19 27,036
159,038 Pool 847919............................... 5.50% 11/01/20 168,243
23,009 Pool 889191............................... 4.50% 04/01/21 23,804
38,241 Pool 889847............................... 4.50% 04/01/21 39,560
165,704 Pool AL0217............................... 5.00% 11/01/18 170,007
Government National Mortgage Association
127,672 Pool 781783............................... 5.50% 08/15/19 132,505
326,221 Pool 783524............................... 5.00% 09/15/24 346,130
---------------
3,817,794
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES................... 46,438,763
(Cost $46,464,472) ---------------
MORTGAGE-BACKED SECURITIES -- 6.4%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.4%
Citigroup Mortgage Loan Trust
489,480 Series 2010-8, Class 5A6 (b).............. 4.00% 11/25/36 490,928
Credit Suisse Mortgage Capital Certificates
259,620 Series 2009-3R, Class 30A1 (a) (b)........ 2.74% 07/27/37 260,098
Wells Fargo Mortgage Loan Trust
752,689 Series 2010-RR1, Class 1A1 (a) (b)........ 3.06% 02/27/37 758,687
---------------
1,509,713
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 6.0%
BAMLL Re-REMIC Trust
439 Series 2011-07C1, Class A3A (b)........... 5.38% 11/15/16 438
Banc of America Commercial Mortgage Trust
493,755 Series 2007-4, Class A1A (a).............. 5.77% 02/10/51 502,947
Bear Stearns Commercial Mortgage Securities
Trust
405,413 Series 2006-PW14, Class A1A............... 5.19% 12/11/38 404,967
1,886,524 Series 2007-PW16, Class A4 (a)............ 5.72% 06/11/40 1,911,389
3,140,549 Series 2007-PW17, Class A1A (a)........... 5.65% 06/11/50 3,217,329
2,073,498 Series 2007-PW17, Class A4 (a)............ 5.69% 06/11/50 2,120,419
318,654 Series 2007-T26, Class A1A (a)............ 5.45% 01/12/45 321,286
Page 18 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
CFCRE Commercial Mortgage Trust
$ 40,677 Series 2011-C2, Class A2.................. 3.06% 12/15/47 $ 40,692
Citigroup Commercial Mortgage Trust
964,199 Series 2010-RR3, Class MLSR (a) (b)....... 5.74% 06/14/50 970,175
Citigroup/Deutsche Bank Commercial Mortgage
Trust
917,826 Series 2007-CD4, Class A1A (a)............ 5.29% 12/11/49 921,916
861,629 Series 2007-CD4, Class A4................. 5.32% 12/11/49 864,548
Commercial Mortgage Loan Trust
597,981 Series 2008-LS1, Class A1A (a)............ 6.30% 12/10/49 617,306
Commercial Mortgage Trust
1,690,558 Series 2007-GG9, Class A4................. 5.44% 03/10/39 1,696,382
51,966 Series 2012-CR1, Class A2................. 2.35% 05/15/45 52,120
GS Mortgage Securities Trust
18,528 Series 2011-GC5, Class A2................. 3.00% 08/10/44 18,518
JP Morgan Chase Commercial Mortgage
Securities Corp.
154,331 Series 2012-C8, Class A2.................. 1.80% 10/15/45 154,826
JP Morgan Chase Commercial Mortgage
Securities Trust
2,121,307 Series 2007-CB18, Class A1A (a)........... 5.43% 06/12/47 2,128,100
LB-UBS Commercial Mortgage Trust
3,582,715 Series 2007-C7, Class A3 (a).............. 5.87% 09/15/45 3,690,882
Morgan Stanley Capital I Trust
331,281 Series 2007-T27, Class A1A (a)............ 5.64% 06/11/42 337,753
2,419,763 Series 2007-T27, Class A4 (a)............. 5.64% 06/11/42 2,462,817
974,816 Series 2012-C4, Class A2.................. 2.11% 03/15/45 976,986
Morgan Stanley RE-Remic Trust
1,149,107 Series 2009-GG10, Class A4A (a) (b)....... 5.79% 08/12/45 1,155,274
1,917,762 Series 2010-GG10, Class A4A (a) (b)....... 5.79% 08/15/45 1,928,055
Wachovia Bank Commercial Mortgage Trust
672,649 Series 2007-C32, Class A1A (a)............ 5.70% 06/15/49 681,717
29,148 Series 2007-C32, Class A2 (a)............. 5.70% 06/15/49 29,125
WFRBS Commercial Mortgage Trust
330,711 Series 2012-C6, Class A2.................. 2.19% 04/15/45 331,086
81,241 Series 2014-C20, Class A1................. 1.28% 05/15/47 81,176
---------------
27,618,229
---------------
TOTAL MORTGAGE-BACKED SECURITIES.......................................... 29,127,942
(Cost $29,435,924) ---------------
ASSET-BACKED SECURITIES -- 0.4%
Aegis Asset Backed Securities Trust 2005-3
213,959 Series 2005-3, Class M1 (a)............... 1.00% 08/25/35 212,402
Ameriquest Mortgage Securities, Inc.
157,463 Series 2005-R11, Class A2D (a)............ 0.86% 01/25/36 155,646
Bear Stearns Asset Backed Securities I Trust
246,973 Series 2005-FR1, Class M1 (a)............. 1.28% 06/25/35 246,109
Citigroup Mortgage Loan Trust
322,304 Series 2005-OPT3, Class M2 (a)............ 1.21% 05/25/35 321,081
First Franklin Mortgage Loan Trust
38,325 Series 2005-FF6, Class M1 (a)............. 1.16% 05/25/36 38,260
See Notes to Financial Statements Page 19
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
ASSET-BACKED SECURITIES (CONTINUED)
Mercedes Benz Auto Lease Trust
$ 60,000 Series 2015-A, Class A4...................... 1.21% 10/15/20 $ 60,033
New Century Home Equity Loan Trust
42,929 Series 2005-3, Class M1 (a)............... 1.01% 07/25/35 43,018
Option One Mortgage Loan Trust
286,917 Series 2005-1, Class A1A (a).............. 1.03% 02/25/35 285,291
265,000 Series 2005-4, Class A4 (a).................. 0.89% 11/25/35 264,007
165,903 Series 2005-5, Class A3 (a)............... 0.74% 12/25/35 165,394
RAMP
105,479 Series 2005-EFC5, Class M1 (a)............ 0.93% 10/25/35 105,338
USAA Auto Owner Trust
91,747 Series 2014-1, Class A4................... 0.94% 05/15/19 91,750
---------------
TOTAL ASSET-BACKED SECURITIES............................................. 1,988,329
(Cost $1,988,123) ---------------
U.S. GOVERNMENT NOTES -- 0.2%
1,000,000 U.S. Treasury Note........................... 0.63% 06/30/17 1,000,215
---------------
TOTAL U.S. GOVERNMENT NOTES............................................... 1,000,215
(Cost $999,300) ---------------
TOTAL INVESTMENTS -- 101.1%............................................... 463,549,639
(Cost $463,517,282) (c)
NET OTHER ASSETS AND LIABILITIES -- (1.1)%................................ (5,137,037)
---------------
NET ASSETS -- 100.0%...................................................... $ 458,412,602
===============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at October 31, 2016.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor. Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At October 31, 2016, securities noted as such
amounted to $51,046,162 or 11.1% of net assets.
(c) Aggregate cost for federal income tax purposes is $463,543,298. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$427,054 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$420,713.
Page 20 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as
of October 31, 2016 is as follows (see Note 2A - Portfolio Valuation in the
Notes to Financial Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Commercial Paper*.................................. $ 162,713,043 $ -- $ 162,713,043 $ --
Corporate Bonds*................................... 155,822,812 -- 155,822,812 --
Foreign Corporate Bonds*........................... 66,458,535 -- 66,458,535 --
U.S. Government Agency Mortgage-
Backed Securities............................... 46,438,763 -- 46,438,763 --
Mortgage-Backed Securities......................... 29,127,942 -- 29,127,942 --
Asset-Backed Securities............................ 1,988,329 -- 1,988,329 --
U.S. Government Notes.............................. 1,000,215 -- 1,000,215 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 463,549,639 $ -- $ 463,549,639 $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2016.
See Notes to Financial Statements Page 21
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value..................................................... $ 463,549,639
Cash...................................................................... 117,042
Receivables:
Interest............................................................... 1,030,283
Reclaims............................................................... 3,328
--------------
Total Assets........................................................... 464,700,292
--------------
LIABILITIES:
Payables:
Investment securities purchased ....................................... 6,202,342
Investment advisory fees............................................... 85,348
--------------
Total Liabilities...................................................... 6,287,690
--------------
NET ASSETS................................................................ $ 458,412,602
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 460,266,810
Par value................................................................. 76,497
Accumulated net investment income (loss).................................. 305,136
Accumulated net realized gain (loss) on investments....................... (2,268,198)
Net unrealized appreciation (depreciation) on investments................. 32,357
--------------
NET ASSETS................................................................ $ 458,412,602
==============
NET ASSET VALUE, per share................................................ $ 59.93
==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share)............................................. 7,649,724
==============
Investments, at cost...................................................... $ 463,517,282
==============
Page 22 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest.................................................................. $ 4,090,150
Dividends - Affiliated (See Note 2C)...................................... 30,312
--------------
Total investment income................................................ 4,120,462
--------------
EXPENSES:
Investment advisory fees.................................................. 1,422,534
Less fees waived by the investment advisor............................. (639,480)
--------------
Net expenses........................................................... 783,054
--------------
NET INVESTMENT INCOME (LOSS).............................................. 3,337,408
--------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments - Unaffiliated............................................. 105,123
Investments - Affiliated (See Note 2C)................................. (223,735)
--------------
Net realized gain (loss).................................................. (118,612)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments - Unaffiliated............................................. 141,146
Investments - Affiliated (See Note 2C)................................. 78,707
--------------
Net change in unrealized appreciation (depreciation)...................... 219,853
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 101,241
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 3,438,649
==============
See Notes to Financial Statements Page 23
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 3,337,408 $ 3,254,542
Net realized gain (loss)............................................... (118,612) (1,626,924)
Net change in unrealized appreciation (depreciation)................... 219,853 (209,955)
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 3,438,649 1,417,663
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (3,268,343) (2,887,800)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 823,475,697 2,912,255,614
Cost of shares redeemed................................................ (515,062,269) (3,328,309,273)
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions........................................................ 308,413,428 (416,053,659)
-------------- --------------
Total increase (decrease) in net assets................................ 308,583,734 (417,523,796)
NET ASSETS:
Beginning of period.................................................... 149,828,868 567,352,664
-------------- --------------
End of period.......................................................... $ 458,412,602 $ 149,828,868
============== ==============
Accumulated net investment income (loss) at end of period.............. $ 305,136 $ 413,174
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 2,499,724 9,450,001
Shares sold............................................................ 13,750,000 66,800,000
Shares redeemed as a result of reverse share split (See Note 4) ....... -- (18,300,277)
Shares redeemed........................................................ (8,600,000) (55,450,000)
-------------- --------------
Shares outstanding, end of period...................................... 7,649,724 2,499,724
============== ==============
Page 24 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 8/5/2014 (a)
------------------------------- THROUGH
2016 2015 10/31/2014 (b)
-------------- -------------- --------------
Net asset value, beginning of period........................... $ 59.94 $ 60.04 $ 60.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................... 0.47 0.43 0.06
Net realized and unrealized gain (loss)........................ 0.09 (0.26) 0.04
---------- ---------- ----------
Total from investment operations............................... 0.56 0.17 0.10
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................................... (0.57) (0.27) (0.06)
---------- ---------- ----------
Net asset value, end of period................................. $ 59.93 $ 59.94 $ 60.04
========== ========== ==========
TOTAL RETURN (c)............................................... 0.94% 0.29% 0.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................... $ 458,413 $ 149,829 $ 567,353
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets.................. 0.45% 0.45% 0.45% (d)
Ratio of net expenses to average net assets.................... 0.25% 0.23% 0.26% (d)
Ratio of net investment income (loss) to average net assets.... 1.06% 0.51% 0.64% (d)
Portfolio turnover rate (e).................................... 115% 406% 0%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) All per share amounts and net asset values have been adjusted to reflect
the impact of the 1-for-2 reverse share split on November 10, 2014. The
net asset value reported on October 31, 2014 prior to the reverse share
split restatement was $30.02.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived by the investment advisor.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions, if any.
See Notes to Financial Statements Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Enhanced Short Maturity ETF (the "Fund"), which
trades under the ticker "FTSM" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash and, in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The Fund is an actively managed exchange-traded fund ("ETF"). The Fund's
investment objective is to seek current income, consistent with preservation of
capital and daily liquidity. Under normal market conditions, the Fund will
invest at least 80% of its net assets in a portfolio of U.S. dollar-denominated
fixed- and variable-rate instruments (collectively, "Fixed Income Securities")
issued by U.S. and non-U.S. public and private sector entities. Fixed Income
Securities will include the following types of fixed- and variable-rate debt
securities: corporate and government bonds and notes; agency securities;
instruments of non-U.S. issuers in developed markets; privately issued
securities; asset-backed securities; mortgage-related securities; municipal
bonds and money market securities. The Fund may also invest in investment
companies, such as ETFs, that invest in primarily Fixed Income Securities. The
Fund will limit its investments in asset-backed securities and non-agency
mortgage-backed securities (in the aggregate) to 20% of its net assets. The Fund
may also invest up to 20% of its net assets in floating rate loans. The floating
rate loans will represent amounts borrowed by companies or other entities from
banks and other lenders and a significant portion of such floating rate loans
may be rated below investment grade or unrated. Floating rate loans held by the
Fund may be senior or subordinate obligations of the borrower and may or may not
be secured by collateral. Under normal market conditions, the Fund's average
duration is expected to be below one year and the average maturity of the Fund's
portfolio is expected to be below three years.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Corporate bonds, corporate notes, municipal securities, U.S. government
securities, mortgage-backed securities, asset-backed securities and other
debt securities are fair valued on the basis of valuations provided by
dealers who make markets in such securities or by a third-party pricing
service approved by the Trust's Board of Trustees, which may use the
following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding Nasdaq and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Commercial paper, fixed income and other debt securities having a
remaining maturity of 60 days or less when purchased are fair valued at
cost adjusted for amortization of premiums and accretion of discounts
(amortized cost), provided the Advisor's Pricing Committee has determined
that the use of amortized cost is an appropriate reflection of fair value
given market and issuer-specific conditions existing at the time of the
determination. Factors that may be considered in determining the
appropriateness of the use of amortized cost include, but are not limited
to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities of the
borrower/issuer, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management (for corporate debt
only);
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry (for corporate debt only);
12) the borrower's/issuer's competitive position within the industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
C. AFFILIATED TRANSACTIONS
The Fund may invest in affiliated funds. Dividend income, realized gains and
losses, and change in appreciation (depreciation) from the affiliated fund are
presented on the Statement of Operations. The Fund's investment performance and
risks are directly related to the investment performance and risks of the
affiliated fund.
Amounts related to this investment for the fiscal year ended October 31, 2016
are as follows:
SHARE ACTIVITY
-----------------------------------------------------
BALANCE AT BALANCE AT VALUE AT DIVIDEND REALIZED
SECURITY NAME 10/31/15 PURCHASES SALES 10/31/16 10/31/16 INCOME GAIN (LOSS)
---------------------------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
First Trust Senior Loan Fund 147,215 -- (147,215) -- $ -- $ 30,312 $ (223,735)
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income.............................. $ 3,268,343 $ 2,887,800
Capital gain................................. -- --
Return of capital............................ -- --
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016
As of October 31, 2016, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................ $ 305,136
Accumulated capital and other gain (loss).... (2,242,182)
Net unrealized appreciation (depreciation)... 6,341
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had $2,242,182 of non-expiring capital loss carryforwards that may be
carried forward indefinitely.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2014,
2015 and 2016 remain open to federal and state audit. As of October 31, 2016,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statement of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of income and gains on various investment securities held by the Fund and
in-kind transactions. The results of operations and net assets were not affected
by these adjustments. For the fiscal year ended October 31, 2016, the
adjustments for the Fund were as follows:
ACCUMULATED
ACCUMULATED NET REALIZED
NET INVESTMENT GAIN (LOSS)
INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL
----------------- ----------------- -----------------
$ (177,103) $ (494,380) $ 671,483
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016
Pursuant to the Investment Management Agreement between the Trust and Advisor,
First Trust manages the investment of the Fund's assets and is responsible for
the Fund's expenses, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, but excluding fee payments
under the Investment Management Agreement, interest, taxes, acquired fund fees
and expenses with the exception of those attributable to affiliated funds,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and service fees pursuant to a 12b-1 plan,
if any, and extraordinary expenses. The Fund has agreed to pay First Trust an
annual unitary management fee equal to 0.45% of its average daily net assets.
Pursuant to contractual agreements, First Trust has agreed to waive management
fees of 0.20% of average daily net assets until March 1, 2018. The waiver
agreement may be terminated by action of the Trust's Board of Trustees at any
time upon 60 days' written notice by the Trust on behalf of the Fund or by the
Fund's investment advisor only after March 1, 2018. Pursuant to a contractual
agreement between the Trust, on behalf of the Fund, and First Trust, the
management fees paid to First Trust will be reduced by the portion of the
management fees earned by First Trust from the Fund for assets invested in other
investment companies advised by First Trust. This contractual agreement shall
continue until the earlier of (i) its termination at the direction of the
Trust's Board of Trustees or (ii) upon termination of the Fund's management
agreement with First Trust; however, it is expected to remain in place at least
until March 1, 2018. First Trust does not have the right to recover the fees
waived that are attributable to the assets invested in other investment
companies advised by First Trust.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen will rotate every three years. The officers and "Interested" Trustee
receive no compensation from the Trust for acting in such capacities.
4. REVERSE SHARE SPLIT
On October 29, 2014, the Trust's Board of Trustees approved a one-for-two
reverse share split, whereby each share of the Fund outstanding as of the close
of business on November 7, 2014 automatically converted to one-half share as of
the opening of business on November 10, 2014. For the fiscal year ended October
31, 2015, the share transactions on the Statements of Changes in Net Assets
reflect the actual transactions, including the impact of the reverse share
split. As a result of the reverse share split, fractional shares totaling 277
shares were redeemed and paid out to shareholders. The reverse share split had
no impact on the overall value of a shareholder's investment in the Fund.
5. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the fiscal year ended October
31, 2016, were $66,984,257 and $236,332,978, respectively. The proceeds from
sales and paydowns of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the fiscal year ended October
31, 2016 were $25,955,394 and $121,250,345, respectively.
For the fiscal year ended October 31, 2016, the Fund had no in-kind
transactions.
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities
Page 30
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016
determined by First Trust (the "Deposit Securities") and generally make or
receive a cash payment referred to as the "Cash Component," which is an amount
equal to the difference between the NAV of the Fund Shares (per Creation Unit
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. The Fund's Creation Units
are generally issued and redeemed for cash. If the Cash Component is a positive
number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount),
the Authorized Participant 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 Authorized Participant will receive the Cash
Component. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. 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 the 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.
Authorized Participants redeeming Creation Units must pay to BNYM, as transfer
agent, a redemption transaction fee (the "Redemption Transaction Fee"),
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 the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 31, 2018.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On November 21, 2016, the Fund declared a distribution of $0.06 per share to
shareholders of record on November 25, 2016, payable November 30, 2016.
Page 31
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST ENHANCED SHORT MATURITY
ETF:
We have audited the accompanying statement of assets and liabilities of First
Trust Enhanced Short Maturity ETF (the "Fund"), a series of the First Trust
Exchange-Traded Fund IV, including the portfolio of investments, as of October
31, 2016, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2016, by correspondence with the Fund's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Enhanced Short Maturity ETF as of October 31, 2016, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 21, 2016
Page 32
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30
will be available (1) without charge, upon request, by calling (800) 988-5891;
(2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
FEDERAL TAX INFORMATION
Distributions paid to foreign shareholders between the period January 1, 2016
and October 31, 2016 that were properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," may not be
subject to federal income tax provided that the income was earned directly by
such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2016, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
RISK CONSIDERATIONS
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
ASSET-BACKED AND MORTGAGE-RELATED SECURITIES RISK. The risk of investing in
mortgage-related and other asset-backed securities, including interest rate
risk, extension risk and prepayment risk. Generally, rising interest rates tend
to extend the duration of fixed rate mortgage-related securities, making them
more sensitive to changes in interest rates. Extension risk is prevalent when in
a period of rising interest rates, the Fund holds mortgage-related securities
and such securities exhibit additional volatility. Prepayment risk is prevalent
when in a period of declining interest rates, borrowers may pay off their
mortgages sooner than expected. Prepayments can reduce the returns of the Fund
because the Fund may have to reinvest that money at the lower prevailing
interest rates. The Fund's investments in asset-backed securities are subject to
risks similar to those associated with mortgage-related securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
CALL RISK. If an issuer calls higher yielding debt instruments held by the Fund,
performance could be adversely impacted.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in kind securities.
As a result, an investment in the Fund may be less tax efficient than an
investment in an ETF that effects its creations and redemption for in kind
securities. Because the Fund may effect a portion of redemptions for cash, it
may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. A sale of shares may result in capital gains
or losses, and may also result in higher brokerage costs.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
FIXED INCOME SECURITIES RISK. An investment in the Fund involves risk associated
with an investment in fixed income securities including the risk that certain of
the securities in the Fund may not have the benefit of covenants that would
prevent the issuer from engaging in capital restructurings or borrowing
transactions in connection with corporate acquisitions, leveraged buyouts or
restructurings. This limitation could reduce the ability of the issuer to meet
its payment obligations and might result in increased credit risk. In addition,
certain of the securities may be redeemed or prepaid by the issuer, resulting in
lower interest payments received by the Fund and reduced distributions to
shareholders.
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
FLOATING RATE LOAN RISK. An investment in floating rate loans subjects the Fund
to credit risk, which is heightened for loans in which the Fund invests because
companies that issue such loans tend to be highly leveraged and thus are more
susceptible to the risks of interest deferral, default and/or bankruptcy. The
loans are usually rated below investment grade but may also be unrated. An
economic downturn would generally lead to a higher non-payment rate, and a loan
may lose significant market value before a default occurs. Moreover, any
specific collateral used to secure a loan may decline in value or become
illiquid, which would adversely affect the loan's value. Unlike the securities
markets, there is no central clearinghouse for loan trades, and the loan market
has not established enforceable settlement standards or remedies for failure to
settle. Therefore, portfolio transactions in loans may have uncertain settlement
time periods. Loans are subject to a number of risks described elsewhere in this
prospectus, including liquidity risk and the risk of investing in below
investment grade debt instruments. Floating rate loans are subject to prepayment
risk. The degree to which borrowers prepay loans, whether as a contractual
requirement or at their election, may be affected by general business
conditions, the financial condition of the borrower and competitive conditions
among loan investors, among others. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced. The
Fund may not be able to reinvest the proceeds received on terms as favorable as
the prepaid loan.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is generally smaller and less liquid than that for
investment grade securities. High yield securities are generally not listed on a
national securities exchange but trade in the over the counter markets. Due to
the smaller, less liquid market for high yield securities, the bid offer spread
on such securities is generally greater than it is for investment grade
securities and the purchase or sale of such securities may take longer to
complete. In general, high yield securities may have a greater risk of default
than other types of securities.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the Fixed
Income Securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term Fixed
Income Securities and higher for longer term Fixed Income Securities. Duration
is a measure of the expected price volatility of a debt security as a result of
changes in market rates of interest, based on, among other factors, the weighted
average timing of the Fixed Income Security's expected principal and interest
payments. In general, duration represents the expected percentage change in the
value of a security for an immediate 1% change in interest rates. Therefore,
prices of Fixed Income Securities with shorter durations tend to be less
sensitive to interest rate changes than Fixed Income Securities with longer
durations. As the value of a Fixed Income Security changes over time, so will
its duration. Mortgage-related securities are particularly subject to the risk
that interest rate volatility may adversely impact the valuation and price of
such securities.
INVESTMENT COMPANIES RISK. The Fund may invest in the shares of other investment
companies, and therefore, the Fund's investment performance and risks may be
related to the investment performance and risks of the underlying funds. In
general, as a shareholder in other investment companies, the Fund bears its
ratable share of the underlying fund's expenses, and would be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Pursuant to a contractual agreement, the Fund's investment advisor
has agreed to reduce the management fee paid by the Fund by the proportional
amount of the acquired fund fees and expenses of the shares of investment
companies held by the Fund so that the Fund would not bear the indirect costs of
holding them, provided, that, the investment companies are advised by the Fund's
investment advisor.
LIQUIDITY RISK. The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders. As of the fourth quarter of 2015, the market for high yield
debt has experienced decreased liquidity, and investor perception of increased
risk has caused yield spreads to widen. Decreased liquidity may negatively
affect the Fund's ability to mitigate risk and meet redemptions.
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. The Fund's investment advisor will apply investment
techniques and risk analyses that may not have the desired result. There can be
no guarantee that the Fund will meet its investment objectives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall security values could decline generally or could
underperform other investments.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets that may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly invested in certain issuers.
NON-U.S. SECURITIES RISK. The Fund invests in securities of non-U.S. issuers.
Non-U.S. securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments;
restrictions on foreign investment or exchange of securities; lack of liquidity;
currency exchange rates; excessive taxation; government seizure of assets;
different legal or accounting standards and less government supervision and
regulation of exchanges in foreign countries.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High portfolio turnover may result in the Fund paying higher levels of
transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause the Fund's performance to be less than you
expect.
SOVEREIGN DEBT RISK. Investments in debt securities issued by foreign
governments ("Sovereign Debt") involve special risks because the governmental
authority that controls the repayment of the debt may be unwilling or unable to
repay the principal and/or interest when due in accordance with the terms of
such securities; the relative size of the debt service burden to the economy as
a whole; or the government debtor's policy towards the International Monetary
Fund and the political constraints to which a government debtor may be subject.
If an issuer of sovereign debt defaults on payments of principal and/or
interest, the Fund may have limited legal recourse against the issuer and/or
guarantor. In certain cases, remedies must be pursued in the courts of the
defaulting party itself, and the Fund's ability to obtain recourse may be
limited.
VOLATILITY RISK. The market price and net asset value of the Fund's shares and
the Fund's yield will change daily. There may be instances when the Fund will
experience large in flows and out flows, which will significantly alter the
Fund's size. At times, these fluctuations may negatively impact the Fund's
yield, result in increased transaction costs for the Fund and contribute to the
overall volatility of the Fund. The risk will be more prevalent when the Fund is
smaller in size, such as during the Fund's invest up period. An investor may
lose money by investing in this Fund because this Fund is not a money market
fund and may experience significant fluctuations in its net asset value.
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund IV
(the "Trust"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Agreement") with First
Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First
Trust Enhanced Short Maturity ETF (the "Fund"). The Board approved the
continuation of the Agreement for a one-year period ending June 30, 2017 at a
meeting held on June 13, 2016. The Board determined that the continuation of the
Agreement is in the best interests of the Fund in light of the extent and
quality of the services provided and such other matters as the Board considered
to be relevant in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Page 35
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
Trustees that, among other things, outlined the services provided by the Advisor
to the Fund (including the relevant personnel responsible for these services and
their experience); the unitary fee rate payable by the Fund as compared to fees
charged to a peer group of funds which were also exchange-traded funds ("ETFs")
compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI
Peer Group"), and as compared to fees charged to other clients of the Advisor,
including other ETFs managed by the Advisor; expenses of the Fund as compared to
expense ratios of the funds in the MPI Peer Group; performance information for
the Fund; the nature of expenses incurred in providing services to the Fund and
the potential for economies of scale, if any; financial data on the Advisor; any
fall-out benefits to the Advisor and its affiliate, First Trust Portfolios L.P.
("FTP"); and information on the Advisor's compliance program. The Board reviewed
initial materials with the Advisor at a special meeting held on April 22, 2016,
prior to which the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor. Following the April meeting,
independent legal counsel on behalf of the Independent Trustees requested
certain clarifications and supplements to the materials provided, and the
information provided in response to those requests was considered at an
executive session of the Independent Trustees and independent legal counsel held
prior to the June 13, 2016 meeting, as well as at the meeting held that day. The
Board applied its business judgment to determine whether the arrangement between
the Trust and the Advisor continues to be a reasonable business arrangement from
the Fund's perspective as well as from the perspective of the Fund's
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreement, the Board had received sufficient
information to renew the Agreement. The Board considered that shareholders chose
to invest or remain invested in the Fund knowing that the Advisor manages the
Fund and knowing the Fund's unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality
of the services provided by the Advisor under the Agreement. The Board
considered that the Advisor is responsible for the overall management and
administration of the Trust and the Fund and reviewed all of the services
provided by the Advisor to the Fund, as well as the background and experience of
the persons responsible for such services. The Board noted that the Fund is an
actively-managed ETF and considered the background and experience of the persons
responsible for the day-to-day management of the Fund's investments. In
reviewing the services provided, the Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Advisor's and the Fund's compliance with the 1940 Act, as
well as the Fund's compliance with its investment objective and policies. In
addition, as part of the Board's consideration of the Advisor's services, the
Advisor, in its written materials and at the April 22, 2016 meeting, described
to the Board the scope of its ongoing investment in additional infrastructure
and personnel to maintain and improve the quality of services provided to the
Fund and the other funds in the First Trust Fund Complex. In light of the
information presented and the considerations made, the Board concluded that the
nature, extent and quality of the services provided to the Trust and the Fund by
the Advisor under the Agreement have been and are expected to remain
satisfactory and that the Advisor has managed the Fund consistent with the
Fund's investment objective and policies.
The Board considered the unitary fee rate payable by the Fund under the
Agreement for the services provided. The Board considered that as part of the
unitary fee the Advisor is responsible for the Fund's expenses, including the
cost of transfer agency, custody, fund administration, legal, audit and other
services and license fees (if any), but excluding interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if
any, and extraordinary expenses. The Board noted that the Advisor agreed to
waive its unitary fee in an amount equal to 0.20% of the Fund's average daily
net assets and to the extent of acquired fund fees and expenses of shares of
investment companies advised by the Advisor that are held by the Fund. The Board
received and reviewed information showing the advisory or unitary fee rates and
expense ratios of the peer funds in the MPI Peer Group, as well as advisory fee
rates charged by the Advisor to other fund (including ETFs) and non-fund
clients. Because the Fund's MPI Peer Group included peer funds that pay a
unitary fee and because the Fund pays a unitary fee, the Board determined that
expense ratios were the most relevant comparative data point. Based on the
information provided, the Board noted that the unitary fee for the Fund, after
taking into account the contractual fee waivers, was below the median total
(net) expense ratio of the peer funds in the MPI Peer Group. With respect to the
MPI Peer Group, the Board discussed with representatives of the Advisor
limitations in creating peer groups for actively-managed ETFs and different
business models that may affect the pricing of services among ETF sponsors. The
Board took these limitations and differences into account in considering the
peer data. With respect to fees charged to other clients, the Board considered
differences between the Fund and other clients that limited their comparability.
In considering the unitary fee rate overall, the Board also considered the
Advisor's statement that it seeks to meet investor needs through innovative and
value-added investment solutions and the Advisor's description of its long-term
commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor for the Fund. The Board determined that this process continues to be
effective for reviewing the Fund's performance. The Board received and reviewed
Page 36
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
information comparing the Fund's performance for periods ended December 31, 2015
to the performance of the MPI Peer Group and to a benchmark index. Based on the
information provided, the Board noted that the Fund underperformed the MPI Peer
Group average but outperformed the benchmark index for the one-year period ended
December 31, 2015.
On the basis of all the information provided on the unitary fee and performance
of the Fund and the ongoing oversight by the Board, the Board concluded that the
unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the
Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board noted that any reduction
in fixed costs associated with the management of the Fund would benefit the
Advisor, but that the unitary fee structure provides a level of certainty in
expenses for the Fund. The Board considered the revenues and allocated costs
(including the allocation methodology) of the Advisor in serving as investment
advisor to the Fund for the twelve months ended December 31, 2015 and the
estimated profitability level for the Fund calculated by the Advisor based on
such data, as well as complex-wide and product-line profitability data for the
same period. The Board noted the inherent limitations in the profitability
analysis, and concluded that, based on the information provided, the Advisor's
profitability level for the Fund was not unreasonable. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund. The Board considered that the Advisor had
identified as a fall-out benefit to the Advisor and FTP their exposure to
investors and brokers who, absent their exposure to the Fund, may have had no
dealings with the Advisor or FTP, and noted that the Advisor does not utilize
soft dollars in connection with its management of the Fund's portfolio.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Trust and the Fund. No single
factor was determinative in the Board's analysis.
Page 37
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
The Fund's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND OR APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None
c/o First Trust Advisors L.P. Limited Partner Gundersen Real Estate
120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed
Suite 400 LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Inception Inc., ADM
Suite 400 Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 137 Director of Trust
c/o First Trust Advisors L.P. (Financial and Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Inception Harapan Educational Foundation Transport Inc.
Suite 400 (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None
Chairman of the Board Advisors L.P. and First Trust
120 E. Liberty Drive, o Since Inception Portfolios L.P.; Chairman of the
Suite 400 Board of Directors, BondWave LLC
Wheaton, IL 60187 (Software Development Company)
D.O.B.: 09/55 and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 38
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust Advisors
D.O.B.: 01/66 L.P. and First Trust Portfolios L.P.; Chief Financial
Officer, BondWave LLC (Software Development
Company) (January 2016 to Present) and
Stonebridge Advisors LLC (Investment Advisor)
(January 2016 to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice
Wheaton, IL 60187 President (September 2006 to April 2012),
D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/
Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 o Since Inception Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to
120 E. Liberty Drive, Present), Vice President (August 2005 to
Suite 400 o Since Inception September 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 11/70
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 39
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and consider your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 40
FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Strategic Income
ETF (FDIV)
Annual Report
For the Year Ended
October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 7
Portfolio of Investments..................................................... 8
Statement of Assets and Liabilities.......................................... 17
Statement of Operations...................................................... 18
Statements of Changes in Net Assets.......................................... 19
Financial Highlights......................................................... 20
Notes to Financial Statements................................................ 21
Report of Independent Registered Public Accounting Firm...................... 32
Additional Information....................................................... 33
Board of Trustees and Officers............................................... 40
Privacy Policy............................................................... 42
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or First Trust Global Portfolios Ltd. ("FTGP");
Energy Income Partners, LLC ("EIP"); Stonebridge Advisors LLC ("Stonebridge");
and/or Richard Bernstein Advisors LLC ("RBA") (each, a "Sub-Advisor" and
together, the "Sub-Advisors") and their respective representatives, taking into
account the information currently available to them. Forward-looking statements
include all statements that do not relate solely to current or historical fact.
For example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Strategic Income ETF; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and/or Sub-Advisors and their respective representatives
only as of the date hereof. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events and circumstances that
arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor and/or Sub-Advisors are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. The material risks of
investing in the Fund are spelled out in the prospectus, the statement of
additional information, this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Strategic Income ETF.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
The primary investment objective of the First Trust Strategic Income ETF (the
"Fund") is to seek risk-adjusted income. The Fund's secondary investment
objective is capital appreciation. The Fund is a multi-manager, multi-strategy
actively managed exchange-traded fund. First Trust Advisors L.P. ("First Trust"
or the "Advisor") serves as the Fund's investment advisor. The Advisor's
Investment Committee determines the Fund's strategic allocation among various
general investment categories and allocates the Fund's assets to portfolio
management teams comprised of personnel of the Advisor and/or a sub-advisor
(each, a "Management Team"), which employ their respective investment
strategies. Shares of the Fund are listed on The Nasdaq Stock Exchange LLC under
the ticker symbol "FDIV."
The Fund's investment categories are: (i) high yield corporate bonds, commonly
referred to as "junk" bonds, and first lien senior secured floating rate bank
loans; (ii) mortgage-related investments; (iii) preferred securities; (iv)
international sovereign bonds, including emerging markets debt; (v) equity
securities of Energy Infrastructure Companies, certain of which are master
limited partnerships ("MLPs"); and (vi) dividend paying U.S. exchange-traded
equity securities and depositary receipts. The Management Teams may utilize a
related option overlay strategy and/or derivative instruments in implementing
their respective investment strategies for the Fund. Additionally, the
Management Teams may seek to gain exposure to the Fund's investment categories
through investments in exchange-traded funds. The Fund seeks to achieve its
objectives by having each Management Team focus on those instruments within its
respective investment category. The Fund may add or remove investment categories
or Management Teams at the discretion of the Advisor.
---------------------------------------------------------------------------------------------------------------
PERFORMANCE
---------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (8/13/14) Inception (8/13/14)
10/31/16 to 10/31/16 to 10/31/16
FUND PERFORMANCE
NAV 8.67% 3.77% 8.54%
Market Price 9.65% 3.96% 8.99%
INDEX PERFORMANCE
Blended Index(1) 7.30% 1.99% 4.46%
Barclays Capital U.S. Aggregate Bond Index 4.38% 3.23% 7.29%
Russell 3000(R) Index 4.24% 5.66% 12.97%
---------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
-----------------------------
(1) The Blended Index is equally weighted to include these six indices: the
Alerian MLP Index, Dow Jones U.S. Select Dividend Index, BofA Merrill
Lynch Fixed Rate Preferred Securities Index, BofA Merrill Lynch U.S. High
Yield Index, Barclays EM USD Aggregate Index and Barclays U.S. MBS Index.
An index does not charge management fees or brokerage expenses, and no
such fees or expenses were deducted from the index performance shown.
Indices are unmanaged and an investor cannot invest directly in an index.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
-----------------------------------------------------------
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Exchange-Traded Funds 43.18%
Common Stocks 24.29
Master Limited Partnerships 10.84
U.S. Government Agency Mortgage-
Backed Securities 10.27
$25 Par Preferred Securities 4.15
Real Estate Investment Trusts 2.64
Foreign Sovereign Bonds 2.57
Mortgage-Backed Securities 1.49
Asset-Backed Securities 0.57
-------
Total 100.00%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
First Trust Senior Loan Fund 12.47%
First Trust Preferred Securities and
Income ETF 12.47
First Trust Emerging Markets Local
Currency Bond ETF 6.68
iShares J.P. Morgan USD Emerging
Markets Bond ETF 6.57
First Trust Tactical High Yield ETF 4.14
Enterprise Products Partners, L.P. 1.53
Citigroup, Inc., Series K 1.17
Spectra Energy Partners, L.P. 1.04
AmTrust Financial Services, Inc. 0.99
Morgan Stanley, Series F 0.99
-------
Total 48.05%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 13, 2014 - OCTOBER 31, 2016
First Trust Strategic Blended Barclays Capital U.S. Russell 3000(R)
Income ETF Index(1) Aggregate Bond Index Index
8/13/14 $10,000 $10,002 $10,003 $10,000
10/31/14 10,177 10,129 10,080 10,371
4/30/15 10,330 10,191 10,288 10,863
10/31/15 9,989 9,735 10,280 10,837
4/30/16 10,436 10,006 10,571 10,844
10/31/16 10,856 10,446 10,731 11,297
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period August 14, 2014 (commencement
of trading) through October 31, 2016. 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. Data presented
represents past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
---------------------------------------- ----------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
8/14/14 - 10/31/14 16 0 0 0 35 5 0 0
11/1/14 - 10/31/15 36 6 6 2 152 33 9 7
11/1/15 - 10/31/16 69 16 7 3 125 27 3 2
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
First Trust Advisors L.P. ("First Trust" or the "Advisor"), 120 East Liberty
Drive, Wheaton, Illinois 60187, is the investment advisor to the First Trust
Strategic Income ETF ("FDIV" or the "Fund"). The following serve as investment
sub-advisors (each, a "Sub-Advisor") to the Fund: First Trust Global Portfolios
Ltd. ("FTGP"); Energy Income Partners, LLC ("EIP"); Stonebridge Advisors LLC
("Stonebridge"); and Richard Bernstein Advisors LLC ("RBA"). The Advisor's
Investment Committee determines the Fund's strategic allocation among various
general investment categories and allocates the Fund's assets to portfolio
management teams comprised of personnel of the Advisor and/or a Sub-Advisor,
which employ their respective investment strategies.
PORTFOLIO MANAGEMENT TEAM
ADVISOR'S INVESTMENT COMMITTEE
The Advisor's Investment Committee, which determines the Fund's strategic
allocation among various general investment categories and allocates the Fund's
assets, consists of:
o DANIEL J. LINDQUIST, CHAIRMAN OF THE INVESTMENT COMMITTEE AND MANAGING
DIRECTOR OF FIRST TRUST;
o DAVID G. MCGAREL, CHIEF INVESTMENT OFFICER AND MANAGING DIRECTOR OF FIRST
TRUST;
o JON C. ERICKSON, SENIOR VICE PRESIDENT OF FIRST TRUST;
o ROGER F. TESTIN, SENIOR VICE PRESIDENT OF FIRST TRUST; o TODD LARSON, CFA,
VICE PRESIDENT AND PORTFOLIO MANAGER OF FIRST TRUST;
o JOHN GAMBLA, CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER OF FIRST TRUST;
o ROB A. GUTTSCHOW, CFA, SENIOR PORTFOLIO MANAGER OF FIRST TRUST; AND
o CHRIS A. PETERSON, CFA, PORTFOLIO MANAGER OF FIRST TRUST
ADVISOR PORTFOLIO MANAGERS
o WILLIAM HOUSEY, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER OF
FIRST TRUST, LEVERAGED FINANCE TEAM;
o SCOTT D. FRIES, SENIOR VICE PRESIDENT OF FIRST TRUST, LEVERAGED FINANCE
TEAM;
o JEREMIAH CHARLES, VICE PRESIDENT AND PORTFOLIO MANAGER OF FIRST TRUST,
FTA-MORTGAGE BACKED SECURITIES TEAM; AND
o JAMES SNYDER, VICE PRESIDENT AND PORTFOLIO MANAGER OF FIRST TRUST,
FTA-MORTGAGE BACKED SECURITIES TEAM.
SUB-ADVISOR PORTFOLIO MANAGERS
o JAMES J. MURCHIE, FOUNDER, CHIEF EXECUTIVE OFFICER, CO-PORTFOLIO MANAGER
AND PRINCIPAL OF EIP.
o DEREK FULTON, CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER OF
FTGP.
o LEONARDO DACOSTA, PORTFOLIO MANAGER OF FTGP.
o RICHARD BERNSTEIN, CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER OF
RBA.
o SCOTT T. FLEMING, PRESIDENT AND CHIEF INVESTMENT OFFICER OF STONEBRIDGE.
COMMENTARY
FIRST TRUST STRATEGIC INCOME ETF
The Fund is an actively managed exchange-traded fund. The primary investment
objective of the Fund is to seek risk-adjusted income. The Fund's secondary
objective is capital appreciation. There is no assurance that the Fund's
investment objectives will be achieved. The Fund may not be appropriate for all
investors.
MARKET RECAP
A year ago, we noted that three factors were looming large over the market: a
slowdown in global economic growth, the uncertainty over the future direction of
crude oil prices, and the Federal Reserve's approach to monetary policy. A year
later, the only factor that has changed in a meaningful way is the price of
crude oil. The rate of global economic growth has remained sluggish, in our
opinion. In October 2016, the International Monetary Fund (IMF) released a
forecast projecting a global GDP growth rate of 3.1% for 2016, no change from
2015. That is down considerably from the 5.4% growth rate registered in 2010.
The IMF is, however, projecting a 3.5% growth rate for 2017. While the Federal
Reserve (the "Fed") did initiate a federal funds rate hike of 25 basis points
("bps") on December 16, 2015, bringing the upper bound of its target rate to
0.50%, the Fed did not follow up with any additional rate hikes in the first 10
months of 2016. Brian Wesbury, Chief Economist at FT Advisors L.P., has
expressed the view that even when the Fed begins to raise rates in earnest, it
will take many rate hikes to get its monetary policy to where it would be
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
considered tight. Wesbury views the first few hikes as the Fed being less loose.
From October 30, 2015 through October 31, 2016, the price of crude oil rose from
$46.59 to $46.86 per barrel, or a gain of just 0.58%, but did climb as high as
$51.60 at the close of October 19, 2016, according to Bloomberg. We believe the
key development was that the price of crude oil bounced off its multi-year low
of $26.21 on February 11, 2016. Crude oil had been as high as $107.26 per barrel
(June 20, 2014) for the three-year period ended October 31, 2016, according to
Bloomberg. The Organization of the Petroleum Exporting Countries (OPEC)
announced on September 28, 2016 that its members would reduce crude oil
production from around 33.24 million barrels per day ("bpd") to a range of 32.5
to 33.0 million bpd, according to Reuters. Less production could help support
higher crude oil prices moving forward, in our opinion.
In March 2015, Swiss Re released a report that stated that the Fed's low
interest rate policy cost savers an estimated $470 billion in interest income
between 2008 and 2013. Based on Swiss Re's math, by the close of 2016, savers
will have been shortchanged by an estimated $752 billion, according to Money
Morning. Swiss Re noted that the segments of the population suffering the most
are those nearing retirement and retirees. As we noted, even if the Fed lifts
the federal funds rate a number of times, short-term interest rates will still
be sitting at very low levels. Investors in need of a relatively high level of
current income will have to assume more risk to attain it, and one of the
primary methods for mitigating risk over time is through diversification and
asset allocation, in our opinion.
PERFORMANCE ANALYSIS
The Fund generated a net asset value ("NAV") return of 8.67% for the 12-month
period ended October 31, 2016. During the same period, the Blended Index
generated a return of 7.30% and the Russell 3000(R) Index generated a return of
4.24%. The Blended Index is equally weighted to include these six indices: the
Alerian MLP Index, Dow Jones U.S. Select Dividend Index, BofA Merrill Lynch
Fixed Rate Preferred Securities Index, BofA Merrill Lynch U.S. High Yield Index,
Barclays EM USD Aggregate Index and Barclays U.S. MBS Index.
The Fund invests in six investment categories which are: high-yield corporate
bonds and floating-rate bank loans, mortgage-related investments, preferred
securities, international sovereign bonds, equity securities of Energy
Infrastructure Companies, and dividend-paying U.S. exchange-traded equity
securities. The Fund may seek exposure to these investment categories through
investment in exchange-traded funds. The weight assigned to each investment
category is determined on a periodic basis. As of October 31, 2016, the
highest-weighted investment category was the dividend-paying U.S.
exchange-traded equity securities and the lowest-weighted investment category
was equity securities of Energy Infrastructure Companies. All six investment
categories have had positive performance for the one-year time period.
The performance for the high-yield corporate bonds and floating-rate bank loans
underperformed the overall performance of the Fund. The avoidance of the energy,
metals and mining industries was a headwind as they were some of the top
performing industries in the asset class. The overweight position within the
healthcare industry was also a headwind to performance as there were an
abundance of negative headlines and more modest returns due to the more
defensive nature of the industry.
Mortgage-related investments were the largest detractor on the overall Fund
performance. The mortgage-related investments appreciated mildly, on a total
return basis, over the last 12 months as mortgage yields declined by
approximately 25 bps on the year. The yield curve was primarily flatter as
ten-to-30-year maturity yields declined by over 30 bps, whereas two-year yields
were higher and five-year yields were down only 21 bps. Mortgage-related
investments benefitted from a barbell maturity strategy positioned for the
flatter yield curve, but performance was dampened by the shorter duration
maintained in the bond rally.
The performance of preferred securities had a positive impact on the overall
performance of the Fund. The positive performance from preferred securities was
a result of a favorable low interest rate environment and continued investor
demand for high income producing securities. The preferred securities in the
Fund outperformed the preferred securities benchmark due to security selection
within retail $25 par preferred securities and an overweight in fixed-to-float
securities.
The relative performance of international sovereign bonds was in-line with the
overall performance of the Fund. Emerging markets benefitted from the rebound in
commodity prices, the slow pace of Fed interest rate hikes and stable U.S.
dollar. As the outlook for economic growth has improved across emerging markets,
investors have benefitted from the high yields on offer and stronger currencies.
Page 5
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
The equity securities of Energy Infrastructure Companies had the largest
positive impact on the overall Fund performance. Performance benefited from
positions in regulated electric utilities and pipeline-related MLPs that
generate stable non-cyclical cash flows and are legal or natural monopolies.
The dividend-paying U.S. exchange-traded equity securities contributed
positively to the Fund's overall performance. Performance was primarily helped
by securities in the utilities, information technology, financials, and
industrials sectors, while it was hurt by the energy and health care sectors. In
terms of industries, positive contributions were driven by exposure to the
following areas: banks, multi-utilities, semiconductors & semiconductor
equipment, electric utilities, equity real estate investment trusts and hotels,
restaurants & leisure. Industry detractors included exposure to the following:
energy equipment & services, specialty retail, pharmaceuticals and capital
markets. A breakdown of performance by market cap reveals that large-cap
securities contributed most positively. A significant allocation across both
small-cap and mid-cap market segments also helped increase the Fund's overall
performance.
MARKET/FUND OUTLOOK
Following are market observations to provide some perspective on the current
economic climate:
Corporate Earnings/Revenue Growth: At this point in the calendar year, it makes
sense to look ahead to 2017. Investors should be looking at earnings and revenue
growth projections as potential catalysts for driving valuations higher, in our
opinion. In dollar terms, Bloomberg's 2017 consensus annual earnings estimate
for the S&P 500(R) Index was $133.04 as of the writing of this report. That was
up from an estimated $118.89 for 2016. At the writing of this report, the
estimated revenue growth rate for the S&P 500(R) Index for 2017 was 6.50%,
according to Bloomberg. That was up significantly from an estimated 1.84% for
2016.
Default Rates: Moody's reported that its global speculative-grade default rate
stood at 4.7% at the end of October, according to its own release. It sees the
rate falling to 4.3% by December 2016, and then falling to 3.3% by October 2017.
Moody's puts the historical average default rate at 4.2% since 1983.
Year-to-date, there were 124 defaults and 60% of them were in commodity-related
sectors. The U.S. speculative-grade default rate stood at 5.6% at the end of
October. It sees the U.S. rate rising to 5.7% by December 2016, but then falling
to 4.1% by October 2017. The default rate on senior loans stood at 2.35% in
October, according to S&P Capital IQ.
Stock Dividends: The S&P Dow Jones Indices, which track approximately 10,000
U.S. traded stocks, announced that total stock dividend distributions increased
by a net (increases less decreases) $6.0 billion in Q3'16, according to its own
release. For the 12-month period ended Q3'16, dividend increases (net) totaled
$20.8 billion, down 55.8% from the $47.1 billion posted for the 12-month period
ended Q3'15. In Q3'16, there were 427 dividend increases, down from the 497
increases in Q3'15. The number of dividends cut or suspended in Q3'16 totaled
115, up from the 105 cut or suspended in Q3'15. Energy issues accounted for
39.0% of the dividend reductions and 33% of the dollar cuts in Q3'16, which
reflects improvement from Q2'16's 43% and 71% dividend and dollar cuts,
according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Fund Flows: For the 12-month period ended October 31, 2016, investors liquidated
an estimated net $120 million from Morningstar's Multisector Bond fund category,
according to its own release. Morningstar tracks capital flows to both open-end
funds and exchange-traded funds. Year-to-date through October 31, 2016, however,
investors funneled an estimated net $4.72 billion into the group. In October
2016, net estimated inflows totaled $366 million.
Page 6
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust Strategic Income ETF (the "Fund"), you incur two
types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-----------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
MAY 1, 2016 OCTOBER 31, 2016 PERIOD (a) PERIOD (b)
-----------------------------------------------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
Actual $1,000.00 $1,040.20 0.55% $2.82
Hypothetical (5% return before expenses) $1,000.00 $1,022.37 0.55% $2.80
(a) These expense ratios reflect expense waivers. See Note 3 in the Notes to
Financial Statements.
(b) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (May 1,
2016 through October 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 7
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
EXCHANGE-TRADED FUNDS -- 41.3%
CAPITAL MARKETS -- 41.3%
26,250 First Trust Emerging Markets Local Currency Bond ETF (a)..................................... $ 1,115,888
106,640 First Trust Preferred Securities and Income ETF (a).......................................... 2,082,679
43,048 First Trust Senior Loan Fund (a)............................................................. 2,083,523
14,322 First Trust Tactical High Yield ETF (a)...................................................... 691,753
745 iShares 20+ Year Treasury Bond ETF........................................................... 97,781
420 iShares 7-10 Year Treasury Bond ETF.......................................................... 46,225
9,567 iShares J.P. Morgan USD Emerging Markets Bond ETF............................................ 1,097,239
---------------
TOTAL EXCHANGE-TRADED FUNDS.................................................................. 7,215,088
(Cost $7,034,162) ---------------
COMMON STOCKS -- 23.3%
BANKS -- 1.1%
1,210 Bank of Hawaii Corp.......................................................................... 90,932
3,139 CVB Financial Corp........................................................................... 52,672
702 NBT Bancorp, Inc............................................................................. 23,664
871 WesBanco, Inc................................................................................ 28,665
---------------
195,933
---------------
CAPITAL MARKETS -- 0.6%
4,077 Federated Investors, Inc., Class B........................................................... 110,079
---------------
COMMERCIAL SERVICES & SUPPLIES -- 0.1%
692 McGrath RentCorp............................................................................. 20,829
---------------
COMMUNICATIONS EQUIPMENT -- 0.8%
4,245 Cisco Systems, Inc........................................................................... 130,237
---------------
DISTRIBUTORS -- 0.7%
1,338 Genuine Parts Co. ......................................................................... 121,209
---------------
DIVERSIFIED CONSUMER SERVICES -- 0.2%
485 Capella Education Co......................................................................... 35,454
---------------
ELECTRIC UTILITIES -- 3.3%
1,785 ALLETE, Inc.................................................................................. 109,403
572 Alliant Energy Corp.......................................................................... 21,765
689 American Electric Power Co., Inc............................................................. 44,675
345 Duke Energy Corp............................................................................. 27,607
387 Emera, Inc. (CAD)............................................................................ 13,497
762 Eversource Energy............................................................................ 41,956
3,692 Hawaiian Electric Industries, Inc............................................................ 108,914
527 NextEra Energy, Inc.......................................................................... 67,456
3,187 Xcel Energy, Inc............................................................................. 132,419
---------------
567,692
---------------
FOOD PRODUCTS -- 0.8%
8,826 Flowers Foods, Inc........................................................................... 136,980
---------------
GAS UTILITIES -- 0.8%
185 Atmos Energy Corp............................................................................ 13,762
640 Chesapeake Utilities Corp.................................................................... 40,992
421 New Jersey Resources Corp.................................................................... 14,293
726 Northwest Natural Gas Co..................................................................... 42,689
Page 8 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS (CONTINUED)
GAS UTILITIES (CONTINUED)
607 UGI Corp..................................................................................... $ 28,098
---------------
139,834
---------------
HEALTH CARE PROVIDERS & SERVICES -- 0.7%
3,879 Owens & Minor, Inc........................................................................... 125,874
---------------
HOTELS, RESTAURANTS & LEISURE -- 1.6%
2,761 Carnival Corp................................................................................ 135,565
1,015 Cracker Barrel Old Country Store, Inc........................................................ 140,070
---------------
275,635
---------------
HOUSEHOLD PRODUCTS -- 0.8%
1,510 Procter & Gamble (The) Co.................................................................... 131,068
---------------
INSURANCE -- 1.6%
2,648 Arthur J. Gallagher & Co..................................................................... 127,713
2,639 Principal Financial Group, Inc............................................................... 144,089
---------------
271,802
---------------
INTERNET & DIRECT MARKETING RETAIL -- 0.1%
1,085 PetMed Express, Inc.......................................................................... 21,559
---------------
IT SERVICES -- 0.7%
2,331 Paychex, Inc................................................................................. 128,671
---------------
LEISURE PRODUCTS -- 0.7%
1,503 Hasbro, Inc.................................................................................. 125,365
---------------
MULTILINE RETAIL -- 0.8%
1,967 Target Corp.................................................................................. 135,192
---------------
MULTI-UTILITIES -- 3.0%
2,007 Avista Corp.................................................................................. 83,090
1,741 Consolidated Edison, Inc..................................................................... 131,533
386 National Grid PLC, ADR....................................................................... 25,252
989 Public Service Enterprise Group, Inc......................................................... 41,617
573 SCANA Corp................................................................................... 42,035
390 Sempra Energy................................................................................ 41,769
2,666 WEC Energy Group, Inc........................................................................ 159,213
---------------
524,509
---------------
OIL, GAS & CONSUMABLE FUELS -- 2.2%
1,623 Enbridge Income Fund Holdings, Inc. (CAD).................................................... 41,189
316 Enbridge, Inc................................................................................ 13,642
1,316 Inter Pipeline Ltd. (CAD).................................................................... 27,285
3,663 Kinder Morgan, Inc........................................................................... 74,835
843 Targa Resources Corp......................................................................... 37,008
3,212 TransCanada Corp............................................................................. 145,440
1,692 Williams (The) Cos., Inc..................................................................... 49,406
---------------
388,805
---------------
PHARMACEUTICALS -- 0.8%
3,522 Sanofi, ADR.................................................................................. 136,971
---------------
SPECIALTY RETAIL -- 0.2%
1,140 Cato (The) Corp., Class A.................................................................... 33,824
---------------
See Notes to Financial Statements Page 9
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS (CONTINUED)
TEXTILES, APPAREL & LUXURY GOODS -- 1.5%
3,680 Coach, Inc................................................................................... $ 132,075
2,406 VF Corp...................................................................................... 130,429
---------------
262,504
---------------
TRANSPORTATION INFRASTRUCTURE -- 0.2%
399 Grupo Aeroportuario del Pacifico, S.A.B. de C.V., ADR........................................ 38,555
---------------
TOTAL COMMON STOCKS.......................................................................... 4,058,581
(Cost $3,918,138) ---------------
UNITS DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
MASTER LIMITED PARTNERSHIPS -- 10.4%
CHEMICALS -- 0.3%
2,292 Westlake Chemical Partners, L.P.............................................................. 48,361
---------------
GAS UTILITIES -- 0.6%
1,827 AmeriGas Partners, L.P....................................................................... 87,239
416 Suburban Propane Partners, L.P............................................................... 13,391
---------------
100,630
---------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS -- 0.5%
3,493 NextEra Energy Partners, L.P. (b)............................................................ 95,534
---------------
OIL, GAS & CONSUMABLE FUELS -- 9.0%
1,221 Alliance Holdings GP, L.P.................................................................... 37,070
3,470 Alliance Resource Partners, L.P.............................................................. 86,750
546 Buckeye Partners, L.P........................................................................ 35,239
4,994 Columbia Pipeline Partners, L.P.............................................................. 79,904
6,634 Enbridge Energy Partners, L.P................................................................ 163,528
10,137 Enterprise Products Partners, L.P............................................................ 255,858
1,630 EQT Midstream Partners, L.P.................................................................. 122,038
3,955 Holly Energy Partners, L.P................................................................... 120,825
2,354 Magellan Midstream Partners, L.P............................................................. 158,259
1,759 ONEOK Partners, L.P.......................................................................... 69,903
4,473 Plains All American Pipeline, L.P............................................................ 135,800
4,091 Spectra Energy Partners, L.P................................................................. 174,440
868 Tallgrass Energy Partners, L.P............................................................... 39,260
1,680 TC PipeLines, L.P............................................................................ 87,629
---------------
1,566,503
---------------
TOTAL MASTER LIMITED PARTNERSHIPS............................................................ 1,811,028
(Cost $1,659,687) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 9.8%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.3%
Federal Home Loan Mortgage Corporation
$ 20,819 Series 1998-192, Class IO, IO, STRIPS........................ 6.50% 02/01/28 4,817
222 Series 2002-2495, Class UJ................................... 3.50% 07/15/32 222
631 Series 2003-2637, Class F (c)................................ 0.93% 06/15/18 632
16,586 Series 2004-2776, Class QP................................... 4.00% 01/15/34 16,917
Page 10 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corporation (Continued)
$ 154,271 Series 2006-3114, Class GI, IO (c)........................... 6.07% 02/15/36 $ 36,741
12,841 Series 2006-3200, Class PO, PO............................... (d) 08/15/36 11,694
17,856 Series 2007-3373, Class TO, PO............................... (d) 04/15/37 16,952
20,542 Series 2009-3589, Class ZW................................... 4.50% 10/15/39 23,512
18,000 Series 2010-3626, Class ME................................... 5.00% 01/15/40 20,912
11,589 Series 2011-3795, Class CA................................... 4.50% 05/15/39 11,863
9,939 Series 2011-3851, Class SC (c)............................... 7.73% 05/15/40 10,123
31,701 Series 2011-3917, Class AI, IO............................... 4.50% 07/15/26 3,326
17,532 Series 2012-4101, Class QN................................... 3.50% 09/15/42 18,638
Federal National Mortgage Association
10,673 Series 1992-205, Class Z..................................... 7.00% 11/25/22 11,686
41,638 Series 1993-247, Class 2, IO, STRIPS......................... 7.50% 10/25/23 6,517
45 Series 2002-19, Class PE..................................... 6.00% 04/25/17 45
8,837 Series 2002-94, Class HQ..................................... 4.50% 01/25/18 8,959
141,147 Series 2003-339, Class 12, IO, STRIPS........................ 6.00% 06/25/33 29,240
21,310 Series 2003-W2, Class 1A1.................................... 6.50% 07/25/42 24,885
57,022 Series 2005-45, Class SR, IO (c)............................. 6.19% 06/25/35 11,918
18,516 Series 2006-125, Class FA (c)................................ 0.81% 01/25/37 18,439
27,481 Series 2008-24, Class WH..................................... 6.00% 02/25/38 35,489
147,618 Series 2012-409, Class C17, IO, STRIPS....................... 4.00% 11/25/41 25,477
112,463 Series 2015-14, Class IK, IO................................. 0.75% 03/25/45 13,075
Government National Mortgage Association
65,014 Series 1999-30, Class S, IO (c).............................. 8.07% 08/16/29 15,474
1,362 Series 2005-91, Class PC..................................... 5.50% 01/20/35 1,392
52,384 Series 2012-34, Class SD, IO (c)............................. 5.52% 03/16/42 10,831
65,474 Series 2013-20, Class KI, IO................................. 5.00% 01/20/43 10,765
72,073 Series 2013-67, Class PI, IO................................. 4.00% 12/16/42 10,934
---------------
411,475
---------------
PASS-THROUGH SECURITIES -- 7.5%
Federal Home Loan Mortgage Corporation
89,249 Pool A47829.................................................. 4.00% 08/01/35 95,786
84,554 Pool A94951.................................................. 4.00% 11/01/40 91,899
44,948 Pool A95134.................................................. 4.50% 11/01/40 49,399
50,813 Pool A97601.................................................. 4.50% 03/01/41 56,874
57,571 Pool G06501.................................................. 4.00% 04/01/41 62,146
19,006 Pool O20138 (c).............................................. 5.00% 11/01/30 21,106
51,064 Pool Q05201.................................................. 4.00% 12/01/41 55,146
79,230 Pool U90316.................................................. 4.00% 10/01/42 85,935
Federal National Mortgage Association
44,522 Pool AB2265.................................................. 4.00% 02/01/41 48,721
80,976 Pool AH1568.................................................. 4.50% 12/01/40 89,195
15,426 Pool AI1191.................................................. 4.50% 04/01/41 16,974
55,494 Pool AI7800.................................................. 4.50% 07/01/41 60,990
37,437 Pool AJ5299.................................................. 4.00% 11/01/41 40,948
58,410 Pool AJ5300.................................................. 4.00% 11/01/41 63,421
55,246 Pool AK3103.................................................. 4.00% 02/01/42 59,759
68,199 Pool AL3484.................................................. 4.50% 10/01/42 75,085
28,983 Pool AO4133.................................................. 3.50% 06/01/42 30,760
22,321 Pool AP4795.................................................. 3.50% 09/01/42 23,615
See Notes to Financial Statements Page 11
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association (Continued)
$ 21,089 Pool AT2887.................................................. 3.50% 04/01/43 $ 22,311
28,719 Pool AU3741.................................................. 3.50% 08/01/43 30,482
82,864 Pool AU4726.................................................. 4.00% 09/01/43 89,982
Government National Mortgage Association
21,408 Pool 3500.................................................... 5.50% 01/20/34 24,280
13,226 Pool 3513.................................................... 5.00% 02/20/34 14,860
34,912 Pool 3555.................................................... 5.00% 05/20/34 39,204
50,223 Pool 609116.................................................. 4.50% 02/15/44 56,084
---------------
1,304,962
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES...................................... 1,716,437
(Cost $1,678,842) ---------------
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
$25 PAR PREFERRED SECURITIES -- 4.0%
BANKS -- 1.1%
6,815 Citigroup, Inc., Series K (c)................................... 6.88% (e) 195,522
---------------
CAPITAL MARKETS -- 1.4%
3,150 Legg Mason, Inc................................................. 6.38% 03/15/56 84,105
5,699 Morgan Stanley, Series F (c).................................... 6.88% (e) 165,613
---------------
249,718
---------------
INSURANCE -- 1.0%
6,223 AmTrust Financial Services, Inc................................. 7.50% 09/15/55 166,029
---------------
INTERNET SOFTWARE & SERVICES -- 0.5%
3,110 eBay, Inc....................................................... 6.00% 02/01/56 82,571
---------------
TOTAL $25 PAR PREFERRED SECURITIES........................................................... 693,840
(Cost $685,094) ---------------
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
REAL ESTATE INVESTMENT TRUSTS -- 2.5%
EQUITY REAL ESTATE INVESTMENT TRUSTS -- 2.5%
1,473 Life Storage, Inc............................................................................ 118,797
1,373 LTC Properties, Inc.......................................................................... 68,801
1,676 National Health Investors, Inc............................................................... 126,974
591 Public Storage............................................................................... 126,309
---------------
TOTAL REAL ESTATE INVESTMENT TRUSTS.......................................................... 440,881
(Cost $434,457) ---------------
Page 12 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLAR)
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
FOREIGN SOVEREIGN BONDS -- 2.5%
AUSTRALIA -- 0.1%
20,000 Australia Government Bond, Series 137 (AUD)..................... 2.75% 04/21/24 $ 15,807
---------------
BRAZIL -- 0.2%
125,000 Brazil Notas Do Tesouro Nacional, Series NTNF (BRL)............. 10.00% 01/01/17 39,033
---------------
COLOMBIA -- 0.3%
165,000,000 Colombian TES, Series B (COP)................................... 5.00% 11/21/18 53,741
---------------
CZECH REPUBLIC -- 0.3%
1,020,000 Czech Republic Government Bond, Series 89 (CZK)................. 2.40% 09/17/25 48,980
---------------
INDONESIA -- 0.3%
517,000,000 Indonesia Treasury Bond, Series FR70 (IDR)...................... 8.38% 03/15/24 42,198
---------------
ISRAEL -- 0.1%
50,000 Israel Government Bond, Series 1026 (ILS)....................... 6.25% 10/30/26 18,260
---------------
MALAYSIA -- 0.2%
150,000 Malaysia Government Bond, Series 0111 (MYR)..................... 4.16% 07/15/21 37,036
---------------
MEXICO -- 0.2%
620,000 Mexican Bonos, Series M 20 (MXN)................................ 10.00% 12/05/24 40,853
---------------
PERU -- 0.1%
30,000 Peru Government Bond (PEN)...................................... 7.84% 08/12/20 9,889
---------------
POLAND -- 0.2%
150,000 Poland Government Bond, Series 1019 (PLN)....................... 5.50% 10/25/19 42,034
---------------
SOUTH AFRICA -- 0.3%
350,000 South Africa Government Bond, Series R186 (ZAR)................. 10.50% 12/21/26 28,774
300,000 South Africa Government Bond, Series R209 (ZAR)................. 6.25% 03/31/36 16,210
---------------
44,984
---------------
TURKEY -- 0.2%
55,000 Turkey Government Bond (TRY).................................... 10.50% 01/15/20 18,370
60,000 Turkey Government Bond (TRY).................................... 8.00% 03/12/25 17,452
---------------
35,822
---------------
TOTAL FOREIGN SOVEREIGN BONDS................................................................ 428,637
(Cost $490,651) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES -- 1.4%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.8%
ABN AMRO Mortgage Corp.
$ 15,815 Series 2003-6, Class 2A2..................................... 4.50% 05/25/18 15,895
Banc of America Alternative Loan Trust
37,989 Series 2004-7, Class 4A1..................................... 5.00% 08/25/19 38,525
BCAP LLC Trust
38,566 Series 2011-R11, Class 30A5 (c) (f).......................... 2.89% 01/26/34 38,095
See Notes to Financial Statements Page 13
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
JPMorgan Resecuritization Trust
$ 11,727 Series 2009-7, Class 5A1 (c) (f)............................. 6.00% 02/27/37 $ 11,774
Residential Accredit Loans, Inc.
24,172 Series 2003-QS5, Class A2 (c)................................ 13.78% 03/25/18 25,335
16,310 Series 2003-QS20, Class CB................................... 5.00% 11/25/18 16,458
Wells Fargo Alternative Loan Trust
2,168 Series 2007-PA5, Class 2A1................................... 6.00% 11/25/22 2,180
---------------
148,262
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.6%
Morgan Stanley Re-REMIC Trust
100,000 Series 2010-GG10, Class A4B (c) (f).......................... 5.79% 08/15/45 100,712
---------------
TOTAL MORTGAGE-BACKED SECURITIES............................................................. 248,974
(Cost $249,379) ---------------
ASSET-BACKED SECURITIES -- 0.5%
Ameriquest Mortgage Securities, Inc.
16,509 Series 2004-R6, Class A1 (c)................................. 0.95% 07/25/34 16,365
First Alliance Mortgage Loan Trust
53,438 Series 1999-1, Class A1...................................... 7.18% 06/20/30 53,756
Home Equity Asset Trust
7,810 Series 2004-5, Class A3 (c).................................. 1.57% 11/25/34 7,817
Lehman XS Trust
16,976 Series 2005-2, Class 1A2 (c)................................. 1.23% 08/25/35 16,321
---------------
TOTAL ASSET-BACKED SECURITIES................................................................ 94,259
(Cost $92,709) ---------------
TOTAL INVESTMENTS -- 95.7%................................................................... 16,707,725
(Cost $16,243,119)(g)
NET OTHER ASSETS AND LIABILITIES -- 4.3%..................................................... 752,680
---------------
NET ASSETS -- 100.0%......................................................................... $ 17,460,405
===============
-----------------------------
(a) Investment in an affiliated fund.
(b) NextEra Energy Partners, L.P. is taxed as a "C" corporation for federal
income tax purposes.
(c) Floating or variable rate security. The interest rate shown reflects the
rate in effect at October 31, 2016.
(d) Zero coupon security.
(e) Perpetual maturity.
(f) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor. Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At October 31, 2016, securities noted as such
amounted to $150,581 or 0.9% of net assets.
(g) Aggregate cost for federal income tax purposes is $16,430,958. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$622,243 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$345,476.
ADR - American Depositary Receipt
IO - Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
PO - Principal-Only Security
STRIPS - Separate Trading of Registered Interest and Principal of Securities.
Page 14 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
Currency Abbreviations:
AUD Australian Dollar
BRL Brazilian Real
CAD Canadian Dollar
COP Colombian Peso
CZK Czech Koruna
IDR Indonesian Rupiah
ILS Israeli Shekel
INR Indian Rupee
MYR Malaysian Ringgit
MXN Mexican Peso
PEN Peruvian Nuevo Sol
PLN Polish Zloty
RUB Russian Ruble
TRY Turkish Lira
USD United States Dollar
ZAR South African Rand
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Exchange-Traded Funds*............................ $ 7,215,088 $ 7,215,088 $ -- $ --
Common Stocks*.................................... 4,058,581 4,058,581 -- --
Master Limited Partnerships*...................... 1,811,028 1,811,028 -- --
U.S. Government Agency Mortgage-Backed
Securities..................................... 1,716,437 -- 1,716,437 --
$25 Par Preferred Securities*..................... 693,840 693,840 -- --
Real Estate Investment Trusts*.................... 440,881 440,881 -- --
Foreign Sovereign Bonds**......................... 428,637 -- 428,637 --
Mortgage-Backed Securities........................ 248,974 -- 248,974 --
Asset-Backed Securities........................... 94,259 -- 94,259 --
--------------- --------------- --------------- ---------------
Total Investments................................. $ 16,707,725 $ 14,219,418 $ 2,488,307 $ --
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Forward Foreign Currency Contracts***............. $ (1,023) $ -- $ (1,023) $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
** See Portfolio of Investments for country breakout.
*** See the table of Forward Foreign Currency Contracts for contract and
currency detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2016.
See Notes to Financial Statements Page 15
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
FORWARD FOREIGN CURRENCY CONTRACTS
--------------------------------------
PURCHASE VALUE SALE VALUE UNREALIZED
SETTLEMENT AMOUNT AMOUNT AS OF AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (a) SOLD (a) OCTOBER 31, 2016 OCTOBER 31, 2016 (DEPRECIATION)
--------------- --------------- ---------------- ------------------- ----------------- ---------------- ---------------
11/01/16 BNS INR 2,450,000 USD 36,726 $ 36,684 $ 36,726 $ (42)
11/30/16 BNYM USD 40,308 PLN 160,000 40,308 40,752 (444)
11/30/16 BNYM USD 17,486 TRY 55,000 17,486 17,662 (176)
11/30/16 BNS INR 2,450,000 USD 36,535 36,520 36,535 (15)
11/30/16 BNS RUB 2,340,000 USD 36,978 36,632 36,978 (346)
--------
Net Unrealized Appreciation (Depreciation)..................................................................... $ (1,023)
========
(a) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
BNS Bank of Nova Scotia (The)
BNYM Bank of New York Mellon (The)
Page 16 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value - Unaffiliated................................... $ 10,733,882
Investments, at value - Affiliated..................................... 5,973,843
Cash................................................................... 262,935
Foreign currency, at value............................................. 12,917
Receivables:
Capital shares sold................................................. 2,491,652
Dividends........................................................... 20,811
Interest............................................................ 17,060
Reclaims............................................................ 1,178
----------------
Total Assets...................................................... 19,514,278
----------------
LIABILITIES:
Unrealized depreciation on forward foreign currency contracts.......... 1,023
Payables:
Investment securities purchased..................................... 2,045,804
Investment advisory fees............................................ 7,046
----------------
Total Liabilities................................................. 2,053,873
----------------
NET ASSETS............................................................. $ 17,460,405
================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 17,401,847
Par value.............................................................. 3,500
Accumulated net investment income (loss)............................... 790
Accumulated net realized gain (loss) on investments, futures contracts,
forward foreign currency contracts, foreign currency transactions
and written options................................................. (409,036)
Net unrealized appreciation (depreciation) on investments, forward
foreign currency contracts and foreign currency translation......... 463,304
----------------
NET ASSETS............................................................. $ 17,460,405
================
NET ASSET VALUE, per share............................................. $ 49.89
================
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share).......................................... 350,002
================
Investments, at cost - Unaffiliated.................................... $ 10,396,410
================
Investments, at cost - Affiliated...................................... $ 5,846,709
================
Foreign currency, at cost (proceeds)................................... $ 13,261
================
See Notes to Financial Statements Page 17
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Dividends - Unaffiliated............................................... $ 264,103
Dividends - Affiliated................................................. 272,836
Interest............................................................... 99,769
Foreign tax withholding................................................ (2,698)
----------------
Total investment income............................................. 634,010
----------------
EXPENSES:
Investment advisory fees............................................... 140,243
Excise tax............................................................. 109
----------------
Total expenses...................................................... 140,352
Less fees waived by the investment advisor.......................... (50,056)
----------------
Net expenses........................................................ 90,296
----------------
NET INVESTMENT INCOME (LOSS)........................................... 543,714
----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments - Unaffiliated.......................................... 147,071
Investments - Affiliated............................................ (144,887)
Distribution of capital gains from investment companies............. 1,888
Futures contracts................................................... 9,780
Forward foreign currency contracts.................................. 2,988
Foreign currency transactions....................................... (1,984)
Written options..................................................... 2,907
----------------
Net realized gain (loss)............................................... 17,763
----------------
Net change in unrealized appreciation (depreciation) on:
Investments - Unaffiliated.......................................... 561,711
Investments - Affiliated............................................ 213,864
Futures contracts................................................... (3,433)
Forward foreign currency contracts.................................. (1,415)
Foreign currency translation........................................ 405
----------------
Net change in unrealized appreciation (depreciation)................... 771,132
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 788,895
----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 1,332,609
================
Page 18 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
-------------- ---------------
OPERATIONS:
Net investment income (loss)........................................ $ 543,714 $ 667,991
Net realized gain (loss)............................................ 17,763 (414,578)
Net increase from payment by the advisor............................ -- 23,478
Net change in unrealized appreciation (depreciation)................ 771,132 (642,603)
-------------- ---------------
Net increase (decrease) in net assets resulting from operations..... 1,332,609 (365,712)
-------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (656,004) (559,024)
Return of capital................................................... -- (208,980)
-------------- ---------------
Total distributions to shareholders................................. (656,004) (768,004)
-------------- ---------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold........................................... 2,491,652 --
Cost of shares redeemed............................................. (4,810,172) --
-------------- ---------------
Net increase (decrease) in net assets resulting from shareholder
transactions..................................................... (2,318,520) --
-------------- ---------------
Total increase (decrease) in net assets............................. (1,641,915) (1,133,716)
NET ASSETS:
Beginning of period................................................. 19,102,320 20,236,036
-------------- ---------------
End of period....................................................... $ 17,460,405 $ 19,102,320
============== ===============
Accumulated net investment income (loss) at end of period........... $ 790 $ (2,815)
============== ===============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period............................. 400,002 400,002
Shares sold......................................................... 50,000 --
Shares redeemed..................................................... (100,000) --
-------------- ---------------
Shares outstanding, end of period................................... 350,002 400,002
============== ===============
See Notes to Financial Statements Page 19
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 8/13/2014 (a)
--------------------------------- THROUGH
2016 2015 10/31/2014
--------------- -------------- --------------
Net asset value, beginning of period $ 47.76 $ 50.59 $ 50.00
--------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 1.60 1.67 0.29
Net realized and unrealized gain (loss) 2.45 (2.58) (b) 0.59
--------- -------- --------
Total from investment operations 4.05 (0.91) 0.88
--------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (1.92) (1.40) (0.27)
Return of capital -- (0.52) (0.02)
--------- -------- --------
Total distributions (1.92) (1.92) (0.29)
--------- -------- --------
Net asset value, end of period $ 49.89 $ 47.76 $ 50.59
========= ======== ========
TOTAL RETURN (c) 8.67% (1.85)% (b) 1.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 17,460 $ 19,102 $ 20,236
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.85% 0.85% 0.85% (d)
Ratio of net expenses to average net assets 0.55% 0.61% 0.69% (d)
Ratio of net investment income (loss) to average net assets 3.30% 3.37% 2.71% (d)
Portfolio turnover rate (e) 88% 125% 33%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) The Fund received a payment from the advisor in the amount of $23,478 in
connection with a trade error. The payment from the advisor represents
$0.06 per share and had no effect on the Fund's total return.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived by the advisor.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 20 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Strategic Income ETF (the "Fund"), which trades
under the ticker "FDIV" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash and, in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The Fund is a multi-manager, multi-strategy actively managed exchange-traded
fund. The Fund's primary investment objective is to seek risk-adjusted income.
The Fund's secondary investment objective is capital appreciation.
First Trust Advisors L.P. ("First Trust" or the "Advisor") is the investment
advisor to the Fund. The following serve as investment sub-advisors to the Fund:
First Trust Global Portfolios Ltd. ("FTGP"); Energy Income Partners, LLC
("EIP"); Stonebridge Advisors LLC ("Stonebridge"); and Richard Bernstein
Advisors LLC ("RBA") (each, a "Sub-Advisor" and together, the "Sub-Advisors").
The Advisor's Investment Committee determines the Fund's strategic allocation
among various general investment categories and allocates the Fund's assets to
portfolio management teams comprised of personnel of the Advisor and/or a
Sub-Advisor (each, a "Management Team"), which employ their respective
investment strategies. The Fund seeks to achieve its objectives by having each
Management Team focus on those investments within its respective investment
category. The Fund may add or remove investment categories or Management Teams
at the discretion of the Advisor.
Under normal market conditions, the Fund will invest in various asset classes,
which include high-yield corporate bonds, senior floating-rate loan interests,
mortgage-related investments, preferred securities, international sovereign
bonds, equity securities of Energy Infrastructure Companies(1), certain of which
are master limited partnerships ("MLPs") and dividend paying U.S.
exchange-traded equity securities and depositary receipts. The Management Team
may utilize a related option overlay strategy and/or derivative instruments in
implementing their respective investment strategies for the Fund. Additionally,
the Management Team may seek exposure to these asset classes through investments
in exchange-traded funds.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee in
accordance with valuation procedures adopted by the Trust's Board of Trustees,
and in accordance with provisions of the 1940 Act.
-----------------------------
(1) Energy Infrastructure Companies are publicly-traded MLPs, MLP affiliates,
Canadian income trusts and their successor companies, pipeline companies,
utilities, and other companies that are involved in operating or providing
services in support of infrastructure assets such as pipeline, power
transmission and petroleum and natural gas storage in the petroleum,
natural gas and power generation industries.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
Investments valued by the Advisor's Pricing Committee, if any, are footnoted as
such in the footnotes to the Portfolio of Investments. All securities and other
assets of the Fund initially expressed in foreign currencies will be converted
to U.S. dollars using exchange rates in effect at the time of valuation. The
Fund's investments are valued as follows:
Corporate bonds, corporate notes, U.S. government securities,
mortgage-backed securities, asset-backed securities and other debt
securities are fair valued on the basis of valuations provided by dealers
who make markets in such securities or by a third-party pricing service
approved by the Trust's Board of Trustees, which may use the following
valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks, preferred stocks, MLPs and other equity securities listed
on any national or foreign exchange (excluding Nasdaq and the London Stock
Exchange Alternative Investment Market ("AIM")) are valued at the last
sale price on the exchange on which they are principally traded or, for
Nasdaq and AIM securities, the official closing price. Securities traded
on more than one securities exchange are valued at the last sale price or
official closing price, as applicable, at the close of the securities
exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by a third-party pricing service.
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities.
Fair valuation of a debt security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities of the
issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt only);
11) the economic, political and social prospects/developments of the
country of issue and the assessment of the country's government
leaders/officials (for sovereign debt only)
12) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of the securities denominated in foreign
currencies is converted into U.S. dollars using exchange rates determined daily
as of the close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital and investment income. The Fund records estimated
return of capital and investment income based on historical information
available from each MLP. These estimates may subsequently be revised based on
information received from the MLPs after their tax reporting periods are
concluded. For the fiscal year ended October 31, 2016, distributions of $113,784
received from MLPs have been reclassified as return of capital.
Distributions received from the Fund's investments in real estate investment
trusts ("REITs") may be comprised of return of capital, capital gains and
income. The actual character of the amounts received during the year is not
known until after the REITs' fiscal year end. The Fund records the character of
distributions received from the REITs during the year based on estimates
available. The characterization of distributions received by the Fund may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or the cost of) the closing transaction
and the Fund's basis in the contract. This realized gain or loss is included in
"Net realized gain (loss) on forward foreign currency contracts" on the
Statement of Operations. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movement in
currency and securities values and interest rates. Due to the risks, the Fund
could incur losses in excess of the net unrealized value shown on the forward
foreign currency contracts table in the Portfolio of Investments. In the event
of default by the Counterparty, the Fund will provide notice to the Counterparty
of the Fund's intent to convert the currency held by the Fund into the currency
that the Counterparty agreed to exchange with the Fund. If a Counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
D. FUTURES CONTRACTS
The Fund may purchase or sell (i.e., is long or short) exchange-listed futures
contracts to hedge against changes in interest rates (interest rate risk).
Futures contracts are agreements between the Fund and a counterparty to buy or
sell a specific quantity of an underlying instrument at a specified price and at
a specified date. Depending on the terms of the contract, futures contracts are
settled either through physical delivery of the underlying instrument on the
settlement date or by payment of a cash settlement amount on the settlement
date. Open futures contracts can also be closed out prior to settlement by
entering into an offsetting transaction in a matching futures contract. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain margin deposits on the futures contract. When the
contract is closed or expires, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in
"Net realized gain (loss) on futures contracts" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked-to-market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures contracts" on
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
the Statement of Operations. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are included in "Variation margin payable or receivable" on
the Statement of Assets and Liabilities. If market conditions change
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contract and may realize a loss. The use of futures contracts involves the risk
of imperfect correlation in movements in the price of the futures contracts,
interest rates and the underlying instruments.
As of October 31, 2016, the Fund had no open futures contracts.
E. OPTIONS CONTRACTS
In the normal course of pursuing its investment objective, the Fund may invest
up to 20% of its net assets in derivative instruments in connection with hedging
strategies. The Fund may invest in exchange-listed futures contracts,
exchange-listed options, exchange-listed options on futures contracts, and
exchange-listed stock index options.
The Fund may purchase (buy) or write (sell) 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 contract may be closed out by an offsetting
purchase or sale of a futures option of the same series. Options are
marked-to-market daily and their value is affected by changes in the value of
the underlying security, changes in interest rates, changes in the actual or
perceived volatility of the securities markets and the underlying securities,
and the remaining time to the option's expiration. The value of options may also
be adversely affected if the market for the options becomes less liquid or the
trading volume diminishes.
The Fund uses options on futures contracts in connection with hedging
strategies. Generally, these strategies are applied under the same market and
market sector conditions in which the Fund uses 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 the
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, the Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of securities. If the price when
the option is exercised is above the exercise price, however, the 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 the 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 the Fund intends to
acquire. Realized gains and losses on purchased options are included in "Net
realized gain (loss) on investments" on the Statement of Operations.
The Fund is required to deposit and maintain margin with respect to put and call
options on futures contracts written by it. 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 the Fund. The Fund will pledge in a segregated account
at the 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 pledged in the segregated account whenever
the total value of the pledged assets falls below the amount due on the
underlying obligation.
The risks associated with the use of options on future contracts include the
risk that the Fund 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. The
Fund's successful use of options on futures contracts depends on the Advisor's
ability to correctly predict the movement in prices on 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 option.
As of October 31, 2016, the Fund had no open options contracts.
F. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received is included in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date for fixed-income securities is included in "Net realized gain (loss)
on investments" on the Statement of Operations.
G. INTEREST-ONLY SECURITIES
An interest-only security ("IO Security") is the interest-only portion of a
mortgage-backed security that receives some or all of the interest portion of
the underlying mortgage-backed security and little or no principal. A reference
principal value called a notional value is used to calculate the amount of
interest due to the IO Security. IO Securities are sold at a deep discount to
their notional principal amount. Generally speaking, when interest rates are
falling and prepayment rates are increasing, the value of an IO Security will
fall. Conversely, when interest rates are rising and prepayment rates are
decreasing, generally the value of an IO Security will rise. These securities,
if any, are identified on the Portfolio of Investments.
H. PRINCIPAL-ONLY SECURITIES
A principal-only security ("PO Security") is the principal-only portion of a
mortgage-backed security that does not receive any interest, is priced at a deep
discount to its redemption value and ultimately receives the redemption value.
Generally speaking, when interest rates are falling and prepayment rates are
increasing, the value of a PO Security will rise. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of a
PO Security will fall. These securities, if any, are identified on the Portfolio
of Investments.
I. STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security known as an IO Security and all
of the principal is distributed to holders of another type of security known as
a PO Security. These securities, if any, are identified on the Portfolio of
Investments.
J. AFFILIATED TRANSACTIONS
The Fund may invest in securities of affiliated funds. Dividend income and
realized gains and losses, and change in appreciation (depreciation) from
affiliated funds are presented on the Statement of Operations. The Fund's
investment performance and risks are directly related to the investment
performance and risks of the affiliated funds.
Amounts related to these investments for the fiscal year ended October 31, 2016
are as follows:
SHARE ACTIVITY
----------------------------------------------------
BALANCE AT BALANCE AT VALUE AT DIVIDEND REALIZED
SECURITY NAME 10/31/15 PURCHASES SALES 10/31/16 10/31/16 INCOME GAIN (LOSS)
----------------------------------------------------------------------------------------------------------------------------
First Trust Emerging Markets
Local Currency Bond ETF 6,600 25,250 (5,600) 26,250 $ 1,115,888 $ 4,227 $ 211
First Trust Low Duration
Opportunities ETF -- 2,781 (2,781) -- -- 5 544
First Trust Preferred
Securities and Income ETF 166,265 30,285 (89,910) 106,640 2,082,679 127,838 (18,095)
First Trust Senior Loan Fund -- 43,048 -- 43,048 2,083,523 5,535 --
First Trust Tactical High Yield
ETF 67,818 6,222 (59,718) 14,322 691,753 135,231 (127,547)
--------------------------------------
$ 5,973,843 $ 272,836 $ (144,887)
======================================
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
K. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on significantly modified portfolio securities
held by the Fund and have no impact on net assets or NAV per share. Temporary
differences, which arise from recognizing certain items of income, expense and
gain/loss in different periods for financial statement and tax purposes, will
reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income................................. $ 656,004 $ 559,024
Capital gain.................................... -- --
Return of capital............................... -- 208,980
As of October 31, 2016, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................... $ --
Accumulated capital and other losses............ (221,442)
Net unrealized appreciation (depreciation) ..... 276,500
L. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had $221,442 of non-expiring capital loss carryforwards for federal income
tax purposes. During the taxable year ended October 31, 2016, the Fund utilized
non-expiring capital loss carryforwards in the amount of $160,883.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2014,
2015 and 2016 remain open to federal and state audit. As of October 31, 2016,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statement of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of income and gains on various investment securities held by the Fund and
in-kind transactions. The results of operations and net assets were not affected
by these adjustments. For the fiscal year ended October 31, 2016, the
adjustments for the Fund were as follows:
ACCUMULATED
ACCUMULATED NET REALIZED
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
---------------- ---------------- ----------------
$ 115,895 $ (49,197) $ (66,698)
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
M. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
N. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016 the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust Funds, including
the Fund, from reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
The Fund and First Trust have retained the Sub-Advisors to provide
recommendations to the Advisor regarding the selection and on-going monitoring
of the securities in the Fund's investment portfolio. First Trust executes all
transactions on behalf of the Fund, with the exception of the securities that
are selected by FTGP. EIP, an affiliate of First Trust, provides recommendations
regarding the selection of MLP securities for the Fund's investment portfolio
and provides ongoing monitoring of the MLP securities, MLP affiliate and energy
infrastructure securities in the Fund's investment portfolio selected by EIP.
EIP exercises discretion only with respect to assets of the Fund allocated to
EIP by the Advisor. FTGP, an affiliate of First Trust, selects international
sovereign debt securities for the Fund's investment portfolio and provides
ongoing monitoring of the international sovereign debt securities in the Fund's
investment portfolio selected by FTGP. RBA provides recommendations regarding
longer term investment strategies that combine top-down, macroeconomic analysis
and quantitatively-driven portfolio construction. Stonebridge, an affiliate of
First Trust, provides recommendations regarding the selection and ongoing
monitoring of the preferred and hybrid securities in the Fund's investment
portfolio.
Pursuant to the Investment Management Agreement between the Trust and Advisor,
First Trust will supervise the Sub-Advisors and their management of the
investment of the Fund's assets and will pay EIP, FTGP, RBA and Stonebridge for
their services as the Fund's sub-advisors. First Trust will also be responsible
for the Fund's expenses, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, but excluding fee payments
under the Investment Management Agreement, interest, taxes, acquired fund fees
and expenses with the exception of those attributable to affiliated Funds,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and service fees pursuant to a 12b-1 plan,
if any, and extraordinary expenses. The Fund has agreed to pay First Trust an
annual unitary management fee equal to 0.85% of its average daily net assets.
Pursuant to a contractual agreement between the Trust, on behalf of the Fund,
and First Trust, the management fees paid to First Trust will be reduced by the
proportional amount of the acquired fund fees and expenses of the shares of
investment companies held by the Fund so that the Fund would not bear the
indirect costs of holding them, provided, that, the investment companies are
advised by First Trust. This contractual agreement shall continue until the
earlier of (i) its termination at the direction of the Trust's Board of Trustees
or (ii) the termination of the Fund's management agreement with First Trust.
First Trust does not have the right to recover the fees waived that are
attributable to acquired fund fees and expenses on the shares of investment
companies advised by First Trust. During the fiscal year ended October 31, 2016,
the Advisor waived fees of $50,056.
During the fiscal year ended October 31, 2015, the Fund received a payment from
the Advisor of $23,478 in connection with a trade error.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen will rotate every three years. The officers and "Interested" Trustee
receive no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments and in-kind transactions for the
fiscal year ended October 31, 2016, were $586,168 and $13,967,952, respectively.
The proceeds from sales and paydowns of U.S. Government securities and non-U.S.
Government securities, excluding short-term investments and in-kind transactions
for the fiscal year ended October 31, 2016 were $705,566 and $18,418,240,
respectively.
For the fiscal year ended October 31, 2016, the cost of in-kind purchases and
proceeds from in-kind sales were $1,927,396 and $0, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
October 31, 2016, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------ -----------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENTS EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ ------------- ----------------------- ---------- ----------------------- ---------
Unrealized appreciation Unrealized depreciation
Forward foreign Currency on forward foreign on forward foreign
currency contracts Risk currency contracts $ -- currency contracts $ 1,023
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the fiscal year
ended October 31, 2016, on derivative instruments, as well as the primary
underlying risk exposure associated with the instruments.
STATEMENT OF OPERATIONS LOCATION
----------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ 2,988
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 1,415)
INTEREST RATE RISK EXPOSURE
Net realized gain (loss) on investments* (5,119)
Net realized gain (loss) on futures contracts 9,780
Net realized gain (loss) on written options 2,907
Net change in unrealized appreciation (depreciation) on
futures contracts (3,433)
* Represents call options purchased.
During the fiscal year ended October 31, 2016, the notional values of forward
foreign currency contracts opened and closed were $956,178 and $827,076,
respectively.
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
During the fiscal year ended October 31, 2016, the notional values of futures
contracts opened and closed were $671,549 and $518,545, respectively.
The Fund does not have the right to offset financial assets and financial
liabilities related to forward foreign currency contracts on the Statement of
Assets and Liabilities.
Written options activity for the Fund for the fiscal year ended October 31, 2016
was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------------------------------- ----------- -----------
Options outstanding at October 31, 2015 -- $ --
Options Written 5 4,771
Options Expired -- --
Options Exercised -- --
Options Closed (5) (4,771)
------- -------
Options outstanding at October 31, 2016 -- $ --
======= =======
During the fiscal year ended October 31, 2016, the number of purchased option
contracts opened and closed were 4 and 4, respectively.
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant'). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities
determined by First Trust (the "Deposit Securities") and generally make or
receive a cash payment referred to as the "Cash Component," which is an amount
equal to the difference between the NAV of the Fund Shares (per Creation Unit
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. The Fund's Creation Units
are generally issued and redeemed for cash. If the Cash Component is a positive
number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount),
the Authorized Participant 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 Authorized Participant will receive the Cash
Component. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. 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 the 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.
Authorized Participants redeeming Creation Units must pay to BNYM, as transfer
agent, a redemption transaction fee (the "Redemption Transaction Fee"),
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 the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
7. BORROWINGS
The Trust on behalf of the Fund, along with First Trust Series Fund and First
Trust Variable Insurance Trust, entered into a $135 million Credit Agreement
(the "BNYM Line of Credit") with BNYM, to be a liquidity backstop during periods
of high redemption volume. A commitment fee of 0.15% of the daily amount of the
excess of the commitment amount over the outstanding principal balance of the
Page 30
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016
loan is charged by BNYM, which First Trust allocates amongst the funds that have
access to the BNYM Line of Credit. To the extent that the Fund accesses the
credit line, there would also be an interest fee charged. The Fund did not have
any borrowings during the fiscal year ended October 31, 2016.
8. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before March 31, 2018.
9. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Fund's maximum exposure under
these arrangements is unknown. However, the Fund has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On November 21, 2016, the Fund declared a distribution of $0.16 per share to
shareholders of record on November 25, 2016, payable November 30, 2016.
Page 31
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST STRATEGIC INCOME ETF:
We have audited the accompanying statement of assets and liabilities of First
Trust Strategic Income ETF (the "Fund"), a series of the First Trust
Exchange-Traded Fund IV, including the portfolio of investments, as of October
31, 2016, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2016, by correspondence with the Fund's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Strategic Income ETF as of October 31, 2016, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 15, 2016
Page 32
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
its portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
FEDERAL TAX INFORMATION
For the taxable year ended October 31, 2016, the following percentages of income
dividend paid by the Fund qualified for the dividends received deduction
available to corporations and is hereby designated as qualified dividend income:
Dividends Received Deduction Qualified Dividend Income
------------------------------ ------------------------------
22.24% 24.57%
RISK CONSIDERATIONS
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objectives will be achieved.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in kind securities.
As a result, an investment in the Fund may be less tax efficient than an
investment in an ETF that effects its creations and redemption for in kind
securities. Because the Fund may effect a portion of redemptions for cash, it
may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. A sale of shares may result in capital gains
or losses, and may also result in higher brokerage costs.
COVERED CALL RISK. The Fund may invest in covered call options. Covered call
risk is the risk that the Fund will forgo, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the strike price of
the call, but has retained the risk of loss should the price of the underlying
security decline. In addition, as the Fund writes covered calls over more of its
portfolio, its ability to benefit from capital appreciation becomes more
limited. The writer of an option has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver the underlying security at the exercise price.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
CURRENCY RISK. The Fund may hold investments that are denominated in non-U.S.
currencies, or in securities that provide exposure to such currencies, currency
exchange rates or interest rates denominated in such currencies. Changes in
currency exchange rates and the relative value of non-U.S. currencies will
affect the value of the Fund's investment and the value of your Fund shares.
Currency exchange rates can be very volatile and can change quickly and
unpredictably. As a result, the value of an investment in the Fund may change
quickly and without warning and you may lose money.
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the equity shares into depositary receipts and vice versa. Such restrictions may
cause the equity shares of the underlying issuer to trade at a discount or
premium to the market price of the depositary receipts.
DERIVATIVES RISK. The use of options and other derivatives can lead to losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivatives.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
ENERGY INFRASTRUCTURE COMPANIES RISK. Energy Infrastructure Companies may be
directly affected by energy commodity prices, especially those companies that
own the underlying energy commodity. A decrease in the production or
availability of natural gas, natural gas liquids, crude oil, coal or other
energy commodities or a decrease in the volume of such commodities available for
transportation, processing, storage or distribution may adversely impact the
financial performance of Energy Infrastructure Companies. Energy Infrastructure
Companies are subject to significant federal, state and local government
regulation in virtually every aspect of their operations, including how
facilities are constructed, maintained and operated, environmental and safety
controls, and the prices they may charge for products and services. Various
governmental authorities have the power to enforce compliance with these
regulations and the permits issued under them and violators are subject to
administrative, civil and criminal penalties, including civil fines, injunctions
or both. Stricter laws, regulations or enforcement policies could be enacted in
the future which would likely increase compliance costs and may adversely affect
the financial performance of Energy Infrastructure Companies. Natural disasters,
such as hurricanes in the Gulf of Mexico, also may impact Energy Infrastructure
Companies.
Certain Energy Infrastructure Companies in the utilities industry are subject to
imposition of rate caps, increased competition due to deregulation, difficulty
in obtaining an adequate return on invested capital or in financing large
construction projects, limitations on operations and increased costs and delays
attributable to environmental considerations, and the capital market's ability
to absorb utility debt. In addition, taxes, government regulation, international
politics, price and supply fluctuations, volatile interest rates and energy
conservation may cause difficulties for these companies. Such issuers have been
experiencing certain of these problems to varying degrees.
EQUITY SECURITIES RISK. The Fund invests in equity securities. The value of the
shares will fluctuate with changes in the value of these equity securities.
Equity securities prices fluctuate for several reasons, including changes in
investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, such as the current market volatility,
or when political or economic events affecting the issuers occur. In addition,
common stock prices may be particularly sensitive to rising interest rates, as
the cost of the capital rises and borrowing costs increase.
FINANCIAL COMPANIES RISK. The Fund invests in financial companies, including
banks, thrifts and their holding companies. Financial companies are especially
subject to the adverse effects of economic recession, currency exchange rates,
government regulation, decreases in the availability of capital, volatile
interest rates, portfolio concentrations in geographic markets and in commercial
and residential real estate loans, and competition from new entrants in their
fields of business.
FIXED INCOME SECURITIES RISK. An investment in the Fund involves risk associated
with an investment in fixed income securities including the risk that certain of
the securities in the Fund may not have the benefit of covenants that would
prevent the issuer from engaging in capital restructurings or borrowing
transactions in connection with corporate acquisitions, leveraged buyouts or
restructurings. This limitation could reduce the ability of the issuer to meet
its payment obligations and might result in increased credit risk. In addition,
certain of the securities may be redeemed or prepaid by the issuer, resulting in
lower interest payments received by the Fund and reduced distributions to
shareholders.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is generally smaller and less liquid than that for
investment grade securities. High yield securities are generally not listed on a
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
national securities exchange but trade in the over-the-counter markets. Due to
the smaller, less liquid market for high yield securities, the bid-offer spread
on such securities is generally greater than it is for investment grade
securities and the purchase or sale of such securities may take longer to
complete.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the debt
securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term debt
securities and higher for longer term investments. Duration is a measure of the
expected price volatility of a debt security as a result of changes in market
rates of interest, based on, among other factors, the weighted average timing of
the debt security's expected principal and interest payments. In general,
duration represents the expected percentage change in the value of a security
for an immediate 1% change in interest rates. Therefore, prices of debt
securities with shorter durations tend to be less sensitive to interest rate
changes than debt securities with longer durations. As the value of a debt
security changes over time, so will its duration. Mortgage-related securities
are particularly subject to the risk that interest rate volatility may adversely
impact the valuation and price of such securities.
INVESTMENT COMPANIES RISK. The Fund may invest in the shares of other investment
companies, and therefore, the Fund's investment performance and risks may be
related to the investment performance and risks of the underlying funds. In
general, as a shareholder in other investment companies, the Fund bears its
ratable share of the underlying fund's expenses, and would be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Pursuant to a contractual agreement, the Advisor has agreed to reduce
the management fee paid by the Fund by the proportional amount of the acquired
fund fees and expenses of the shares of investment companies held by the Fund so
that the Fund would not bear the indirect costs of holding them, provided, that
the investment companies are advised by the Advisor.
LIQUIDITY RISK. The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders. As of the fourth quarter of 2015, the market for high yield
debt has experienced decreased liquidity, and investor perception of increased
risk has caused yield spreads to widen. Decreased liquidity may negatively
affect the Fund's ability to mitigate risk and meet redemptions.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Management Teams will apply investment techniques and risk analyses that may not
have the desired result. There can be no guarantee that the Fund will meet its
investment objectives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall security values could decline generally or could
underperform other investments.
MLP RISK. An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest may exist between common unit holders and the general
partner, including those arising from incentive distribution payments. In
addition, there is the risk that an MLP could be, contrary to its intention,
taxed as a corporation, resulting in decreased returns from such MLP.
MORTGAGE SECURITIES RISK. The Fund invests in mortgage-related securities,
including mortgage-backed securities, which may make the Fund more susceptible
to adverse economic, political or regulatory events that affect the value of
real estate. Changes in local, state and federal policies could negatively
impact the mortgage-related securities market, which include various government
initiated and sponsored homeowner assistance programs and eminent domain issues.
Mortgage-related securities may also face liquidity issues when the Fund seeks
to sell such securities, but is unable to find buyers at a bid ask spread to
make the transaction feasible. These securities are also subject to the risk
that the underlying borrowers may default on their mortgages, resulting in a
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
non-payment of principal and interest. Finally, the mortgage-related securities
market may be negatively impacted by regulatory changes including those that are
related to the mandate or existence of the government-sponsored enterprises,
Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage-related securities are subject
to the risk that the rate of mortgage prepayments decreases, which extends the
average life of a security and increases the interest rate exposure.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets that may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly invested in certain issuers.
NON-U.S. SECURITIES RISK AND EMERGING MARKETS RISK. Non-U.S. securities are
subject to higher volatility than securities of domestic issuers due to possible
adverse political, social or economic developments; restrictions on foreign
investment or exchange of securities; lack of liquidity; currency exchange
rates; excessive taxation; government seizure of assets; different legal or
accounting standards and less government supervision and regulation of exchanges
in foreign countries. These risks may be heightened for securities of companies
located in, or with significant operations in, emerging market countries.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High portfolio turnover may result in the Fund paying higher levels of
transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause the Fund's performance to be less than you
expect.
PREFERRED SECURITIES RISK. Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
securities are also subject to credit risk, interest rate risk and income risk.
SENIOR LOAN RISK. An investment in senior loans subjects the Fund to credit
risk, which is heightened for loans in which the Fund invests because companies
that issue such loans tend to be highly leveraged and thus are more susceptible
to the risks of interest deferral, default and/or bankruptcy. The loans are
usually rated below investment grade but may also be unrated. An economic
downturn would generally lead to a higher non payment rate, and a loan may lose
significant market value before a default occurs. Moreover, any specific
collateral used to secure a loan may decline in value or become illiquid, which
would adversely affect the loan's value. Unlike the securities markets, there is
no central clearinghouse for loan trades, and the loan market has not
established enforceable settlement standards or remedies for failure to settle.
Therefore, portfolio transactions in loans may have uncertain settlement time
periods. Loans are subject to a number of risks described elsewhere in this
prospectus, including liquidity risk and the risk of investing in below
investment grade debt instruments. Floating rate loans are subject to prepayment
risk. The degree to which borrowers prepay loans, whether as a contractual
requirement or at their election, may be affected by general business
conditions, the financial condition of the borrower and competitive conditions
among loan investors, among others. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced. The
Fund may not be able to reinvest the proceeds received on terms as favorable as
the prepaid loan.
SMALL FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively smaller funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than larger, more established companies as a
result of several factors, including limited trading volumes, products or
financial resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies.
Page 36
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund IV
(the "Trust"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Advisory Agreement")
between the Trust, on behalf of First Trust Strategic Income ETF (the "Fund"),
and First Trust Advisors L.P. ("First Trust" or the "Advisor"); the Investment
Sub-Advisory Agreement (the "Stonebridge Sub-Advisory Agreement") among the
Trust, on behalf of the Fund, the Advisor and Stonebridge Advisors LLC
("Stonebridge"); the Investment Sub-Advisory Agreement (the "Richard Bernstein
Sub-Advisory Agreement") among the Trust, on behalf of the Fund, the Advisor and
Richard Bernstein Advisors LLC ("Richard Bernstein"); the Investment
Sub-Advisory Agreement (the "Energy Income Partners Sub-Advisory Agreement")
among the Trust, on behalf of the Fund, the Advisor and Energy Income Partners,
LLC ("Energy Income Partners"); and the Investment Sub-Advisory Agreement (the
"First Trust Global Sub-Advisory Agreement") among the Trust, on behalf of the
Fund, the Advisor and First Trust Global Portfolios Ltd. ("First Trust Global").
The Stonebridge Sub-Advisory Agreement, the Richard Bernstein Sub-Advisory
Agreement, the Energy Income Partners Sub-Advisory Agreement and the First Trust
Global Sub-Advisory Agreement are collectively referred to as the "Sub-Advisory
Agreements." Stonebridge, Richard Bernstein, Energy Income Partners and First
Trust Global are each referred to as a "Sub-Advisor" and collectively as the
"Sub-Advisors." The Sub-Advisory Agreements together with the Advisory Agreement
are referred to as the "Agreements." The Board approved the continuation of the
Agreements for a one-year period ending June 30, 2017 at a meeting held on June
13, 2016. The Board determined that the continuation of the Agreements is in the
best interests of the Fund in light of the extent and quality of the services
provided and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and each Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and each Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the unitary fee
rate payable by the Fund as compared to fees charged to a peer group of funds,
compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI
Peer Group"), and as compared to fees charged to other clients of the Advisor,
including other exchange-traded funds ("ETFs") managed by the Advisor; the
sub-advisory fees for the Fund as compared to fees charged to other clients of
the Sub-Advisors; expenses of the Fund as compared to expense ratios of the
funds in the MPI Peer Group; performance information for the Fund; the nature of
expenses incurred in providing services to the Fund and the potential for
economies of scale, if any; financial data on the Advisor and each Sub-Advisor;
any fall-out benefits to the Advisor and its affiliates, First Trust Portfolios
L.P. ("FTP") and First Trust Global, and the Sub-Advisors; and information on
the Advisor's and each Sub-Advisor's compliance programs. The Board reviewed
initial materials with the Advisor at a special meeting held on April 22, 2016,
prior to at which the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor and the Sub-Advisors. Following
the April meeting, independent legal counsel on behalf of the Independent
Trustees requested certain clarifications and supplements to the materials
provided, and the information provided in response to those requests was
considered at an executive session of the Independent Trustees and independent
legal counsel held prior to the June 13, 2016 meeting, as well as at the meeting
held that day. The Board applied its business judgment to determine whether the
arrangements between the Trust and the Advisor and among the Trust, the Advisor
and each Sub-Advisor continue to be reasonable business arrangements from the
Fund's perspective as well as from the perspective of the Fund's shareholders.
The Board determined that, given the totality of the information provided with
respect to the Agreements, the Board had received sufficient information to
renew the Agreements. The Board considered that shareholders chose to invest or
remain invested in the Fund knowing that the Advisor and the Sub-Advisors manage
the Fund and knowing the Fund's unitary fee.
In reviewing the Agreements, the Board considered the nature, extent and quality
of the services provided by the Advisor and the Sub-Advisors under the
Agreements. The Board considered that the Fund is an actively-traded ETF and
employs a multi-manager/multi-sleeve structure. With respect to the Advisory
Agreement, the Board considered that the Advisor is responsible for the overall
management and administration of the Trust and the Fund and reviewed all of the
services provided by the Advisor to the Fund, including the oversight of the
Sub-Advisors and the strategic and tactical asset allocations among internal
management teams and the Sub-Advisors, as well as the background and experience
of the persons responsible for such services. The Board considered that
Stonebridge and Richard Bernstein act as non-discretionary managers providing
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
model portfolio recommendations to the Advisor, and that while First Trust
Global and Energy Income Partners act as discretionary investment advisors,
First Trust executes the Fund's portfolio trades. The Board noted that members
of First Trust's Mortgage Securities Team and Leveraged Finance Team participate
in the management of the Fund and considered the experience of each Team and the
resources available to them. In reviewing the services provided, the Board noted
the compliance program that had been developed by the Advisor and considered
that it includes a robust program for monitoring the Advisor's, the
Sub-Advisors' and the Fund's compliance with the 1940 Act, as well as the Fund's
compliance with its investment objectives and policies. In addition, as part of
the Board's consideration of the Advisor's services, the Advisor, in its written
materials and at the April 22, 2016 meeting, described to the Board the scope of
its ongoing investment in additional infrastructure and personnel to maintain
and improve the quality of services provided to the Fund and the other funds in
the First Trust Fund Complex. With respect to the Sub-Advisory Agreements, the
Board reviewed the materials provided by each Sub-Advisor and considered the
services that each Sub-Advisor provides to the Fund, including each
Sub-Advisor's discretionary or non-discretionary management, as applicable, of
the portion of the Fund's assets allocated it. In considering each Sub-Advisor's
services to the Fund, the Board noted the background and experience of each
Sub-Advisor's portfolio management team. In light of the information presented
and the considerations made, the Board concluded that the nature, extent and
quality of the services provided to the Trust and the Fund by the Advisor and
each Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Advisor and Sub-Advisors have managed the Fund
consistent with the Fund's investment objectives and policies.
The Board considered the unitary fee rate payable by the Fund under the Advisory
Agreement for the services provided. The Board noted that the Advisor pays each
Sub-Advisor a separate sub-advisory fee from the unitary fee. The Board
considered that as part of the unitary fee the Advisor is responsible for the
Fund's expenses, including the cost of sub-advisory, transfer agency, custody,
fund administration, legal, audit and other services, sub-advisory and license
fees (if any), but excluding interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, distribution
and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses. The Board noted that the Advisor agreed to waive its unitary fee to
the extent of acquired fund fees and expenses of shares of investment companies
advised by the Advisor that are held by the Fund. The Board received and
reviewed information showing the advisory or unitary fee rates and expense
ratios of the peer funds in the MPI Peer Group, as well as advisory fee rates
charged by the Advisor and Sub-Advisors to other fund (including ETFs) and
non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board
determined that expense ratios were the most relevant comparative data point.
Based on the information provided, the Board noted that the unitary fee for the
Fund, after taking into account the contractual fee waiver, was below the median
total (net) expense ratio of the peer funds in the MPI Peer Group. With respect
to the MPI Peer Group, the Board discussed with representatives of the Advisor
limitations in creating peer groups for actively-managed ETFs and that three of
the peer funds were open-end mutual funds. The Board took these limitations and
differences into account in considering the peer data. With respect to fees
charged to other clients, the Board considered differences between the Fund and
other clients that limited their comparability. In considering the unitary fee
overall, the Board also considered the Advisor's statement that it seeks to meet
investor needs through innovative and value-added investment solutions and the
Advisor's description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process that it has established for monitoring the Fund's performance and
portfolio risk on an ongoing basis, which includes periodic performance
reporting from the Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2015 to the performance of the MPI Peer Group and to two
benchmark indexes and a blended benchmark index. Based on the information
provided, the Board noted that the Fund outperformed the MPI Peer Group average
and the blended benchmark index for the one-year period ended December 31, 2015.
The Board also noted that the Fund underperformed the Barclays Capital U.S.
Aggregate Bond Index and the Russell 3000 Index for the one-year period ended
December 31, 2015.
On the basis of all the information provided on the unitary fee and performance
of the Fund and the ongoing oversight by the Board, the Board concluded that the
unitary fee for the Fund continues to be reasonable and appropriate in light of
the nature, extent and quality of the services provided by the Advisor to the
Fund under the Advisory Agreement.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board noted that any reduction
in fixed costs associated with the management of the Fund would benefit the
Advisor, but that the unitary fee structure provides a level of certainty in
expenses for the Fund. The Board considered the revenues and allocated costs
(including the allocation methodology) of the Advisor in serving as investment
advisor to the Fund for the twelve months ended December 31, 2015 and the
Page 38
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
estimated profitability level for the Fund calculated by the Advisor based on
such data, as well as complex-wide and product-line profitability data for the
same period. The Board noted the inherent limitations in the profitability
analysis, and concluded that, based on the information provided, the Advisor's
profitability level for the Fund was not unreasonable. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund. The Board noted that affiliates of the Advisor
have ownership interests in Stonebridge, Energy Income Partners and First Trust
Global and considered potential fall-out benefits to the Advisor from such
ownership interests. The Board also considered that the Advisor had identified
as a fall out benefit to the Advisor and FTP their exposure to investors and
brokers who, absent their exposure to the Fund, may have had no dealings with
First Trust and, additionally, that the Fund provided assets under management to
First Trust Global, an affiliate of First Trust and FTP. The Board noted that
the Advisor does not maintain any soft-dollar arrangements.
With respect to the Stonebridge Sub-Advisory Agreement, the Board considered
Stonebridge's expenses and noted Stonebridge's recent hiring of additional
personnel. The Board considered that the sub advisory fee rate was negotiated at
arm's length between the Advisor and Stonebridge. The Board also considered
information provided by Stonebridge with respect to the profitability of the
Stonebridge Sub Advisory Agreement to Stonebridge. The Board noted the inherent
limitations in the profitability analysis and concluded that the profitability
analysis for the Advisor was more relevant. The Board considered fall-out
benefits that may be realized by Stonebridge from its relationship with the
Fund, including potential fall-out benefits to Stonebridge from the ownership
interest of an affiliate of the Advisor in Stonebridge. The Board noted that
Stonebridge acts as non-discretionary manager providing model portfolio
recommendations to the Advisor and does not provide trade execution services to
the Fund.
With respect to the Richard Bernstein Sub-Advisory Agreement, the Board
considered Richard Bernstein's statements about economies of scale and noted
that Richard Bernstein was profitable as a firm in 2015. The Board noted the
potential fall-out benefits identified by Richard Bernstein as a result of its
relationship with the Fund and the Advisor. The Board noted that Richard
Bernstein acts as non-discretionary manager providing model portfolio
recommendations to the Advisor and does not provide trade execution services to
the Fund.
With respect to the Energy Income Partners Sub-Advisory Agreement, the Board
considered that Energy Income Partners' investment services expenses are
primarily fixed, and that Energy Income Partners has made recent investments in
infrastructure and personnel. The Board considered that the sub advisory fee
rate was negotiated at arm's length between the Advisor and Energy Income
Partners. The Board considered that Energy Income Partners waived its entire
sub-advisory fee under the Energy Income Partners Sub Advisory Agreement in
2015. The Board considered fall-out benefits that may be realized by Energy
Income Partners from its relationship with the Fund, including the potential
fall-out benefits to Energy Income Partners from the ownership interest of an
affiliate of the Advisor in Energy Income Partners. The Board noted that Energy
Income Partners does not provide trade execution services on behalf of the Fund.
With respect to the First Trust Global Sub-Advisory Agreement, the Board
considered the First Trust Global's statements that expenses incurred in
providing services to the Fund are of a fixed nature and that, at this time, no
economies of scale have been identified in providing services to the Fund. The
Board considered that First Trust Global waived its entire sub-advisory fee
under the First Trust Global Sub-Advisory Agreement in 2015. The Board
considered the Advisor's confirmation that it is committed to supporting First
Trust Global. The Board considered the potential fall-out benefits to First
Trust Global from being associated with the Advisor and the Fund. The Board
noted that First Trust Global does not provide trade execution services on
behalf of the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Trust and the Fund. No single
factor was determinative in the Board's analysis.
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 136 None
c/o First Trust Advisors L.P. Limited Partner Gundersen Real Estate
120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed
Suite 400 LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 136 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Inception Inc., ADM
Suite 400 Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises 136 Director of Trust
c/o First Trust Advisors L.P. (Financial and Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 136 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Covenant
120 E. Liberty Drive, o Since Inception Pelita Harapan Educational Foundation Transport Inc.
Suite 400 (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products
and Services); President and Chief
Executive Officer (June 2012 to
September 2014), Dew Learning LLC
(Educational Products and Services);
President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 136 None
Chairman of the Board Advisors L.P. and First Trust
120 E. Liberty Drive, o Since Inception Portfolios L.P.; Chairman of the
Suite 400 Board of Directors, BondWave LLC
Wheaton, IL 60187 (Software Development Company)
D.O.B.: 09/55 and Stonebridge Advisors LLC
(Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 40
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST LENGTH OF SERVICE DURING PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
-----------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust Advisors
D.O.B.: 01/66 L.P. and First Trust Portfolios L.P.; Chief
Financial Officer, BondWave LLC (Software
Development Company) (January 2016 to Present) and
Stonebridge Advisors LLC (Investment Advisor)
(January 2016 to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice
Wheaton, IL 60187 President (September 2006 to April 2012),
D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/
Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Inception Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to
120 E. Liberty Drive, Present), Vice President (August 2005 to
Suite 400 o Since Inception September 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 11/70
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 41
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis, to collect certain anonymous
information when you visit our website. These companies may use non-personally
identifiable information during your visits to this and other websites in order
to provide advertisements about goods and services likely to be of greater
interest to you. These companies typically use a cookie, third party web beacon
or pixel tags, to collect this information. To learn more about this behavioral
advertising practice, you can visit www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 42
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISORS
Energy Income Partners, LLC
10 Wright Street
Westport, CT 06880
First Trust Global Portfolios Limited
8 Angel Court
London EC2R 7HJ
Richard Bernstein Advisors, LLC
120 West 45th Street, 36th Floor
New York, NY 10036
Stonebridge Advisors LLC
10 Westport Road, Suite C101
Wilton, Connecticut, 06897
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Low Duration Opportunities ETF (LMBS)
Annual Report
for the Year Ended
October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary ........................................................ 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 28
Statement of Operations...................................................... 29
Statements of Changes in Net Assets.......................................... 30
Financial Highlights......................................................... 31
Notes to Financial Statements................................................ 32
Report of Independent Registered Public Accounting Firm...................... 41
Additional Information....................................................... 42
Board of Trustees and Officers............................................... 47
Privacy Policy............................................................... 49
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Low Duration Opportunities ETF; hereinafter referred to
as the "Fund") to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of a relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Low Duration Opportunities ETF.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
The primary investment objective of the First Trust Low Duration Opportunities
ETF (the "Fund") is to generate current income. The Fund's secondary investment
objective is to provide capital appreciation. The Fund is an actively managed
exchange-traded fund. First Trust Advisors L.P. ("First Trust" or the "Advisor")
serves as the advisor. Jim Snyder and Jeremiah Charles are the Fund's portfolio
managers and are jointly and primarily responsible for the day-to-day management
of the Fund's investment portfolio.
The Fund's investment categories are: (i) mortgage-related investments,
including mortgage-backed securities that may be, but are not required to be,
issued or guaranteed by the U.S. government or its agencies or
instrumentalities; (ii) U.S. government securities, including callable agency
securities, which give the issuer (the U.S. government agency) the right to
redeem the security prior to maturity, and U.S. government inflation-indexed
securities; and (iii) high yield debt, commonly referred to as "junk" debt.
Although the Fund intends to invest primarily in investment grade securities,
the Fund may invest up to 20% of its net assets (including investment
borrowings) in securities of any credit quality, including securities that are
below investment grade (as described in (iii) above), illiquid securities, and
derivative instruments.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (11/4/14) Inception (11/4/14)
10/31/16 to 10/31/16 to 10/31/16
FUND PERFORMANCE
NAV 7.49% 5.57% 11.38%
Market Price 8.09% 5.68% 11.62%
INDEX PERFORMANCE
BofA Merrill Lynch 1-5 Year US Treasury & Agency Index 1.54% 1.50% 3.00%
----------------------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
-----------------------------------------------------------
% OF LONG-TERM
ASSET CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
U.S. Government Agency Mortgage-Backed
Securities 90.93%
Mortgage-Backed Securities 5.54
Exchange-Traded Funds 1.77
Asset-Backed Securities 1.76
--------
Total 100.00%
========
-----------------------------------------------------------
% OF TOTAL LONG
FIXED-INCOME
CREDIT QUALITY(1) INVESTMENTS & CASH
-----------------------------------------------------------
Government 92.60%
AAA 1.30
AA+ 0.99
AA 0.03
AA- 0.08
A+ 0.14
A 0.01
A- 0.06
BBB+ 0.31
BBB- 0.04
Below Investment Grade 0.92
Not Rated 3.52
Cash 0.00*
--------
Total 100.00%
========
* Amount is less than 0.01%
-----------------------------------------------------------
% OF LONG-TERM
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Federal National Mortgage
Association, Pool AO3529 3.44%
Federal Home Loan Mortgage
Corporation, Series 2016-4559,
Class ML 2.03
Federal National Mortgage
Association, Pool AT2720 1.93
Federal National Mortgage
Association, Series 2007-28,
Class ZA 1.76
Federal National Mortgage
Association, Pool AB2959 1.55
Federal National Mortgage
Association, Pool MA1373 1.52
Federal National Mortgage
Association, Pool MA0443 1.45
Federal National Mortgage
Association, Pool AS9194 1.36
Federal National Mortgage
Association, Pool AI9124 1.34
iShares 20+ Year Treasury Bond ETF 1.15
--------
Total 17.53%
========
-----------------------------
(1) The ratings are by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO), of the
creditworthiness of an issuer with respect to debt obligations. Ratings
are measured highest to lowest on a scale that generally ranges from AAA
to D for long-term ratings and A-1+ to C for short-term ratings.
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher or a short-term credit rating of A-3 or higher.
The credit ratings shown relate to the credit worthiness of the issuers of
the underlying securities in the Fund, and not to the Fund or its shares.
U.S. Treasury and U.S. Agency mortgage-backed securities appear under
"Government". Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 4, 2014 - OCTOBER 31, 2016
First Trust Low Duration BofA Merrill Lynch 1-5 Year
Opportunities ETF US Treasury & Agency Index
11/4/14 $10,000 $10,000
4/30/15 10,236 10,097
10/31/15 10,362 10,144
4/30/16 10,725 10,256
10/31/16 11,138 10,301
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period November 5, 2014
(commencement of trading) through October 31, 2016. 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. Data
presented represents past performance and cannot be used to predict future
results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
---------------------------------------- ----------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
11/5/14 - 10/31/15 144 40 0 1 62 3 0 0
11/1/15 - 10/31/16 178 7 0 0 66 1 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust" or the "Advisor") is the investment
advisor to the First Trust Low Duration Opportunities ETF (the "Fund" or
"LMBS"). In this capacity, First Trust is responsible for the selection and
ongoing monitoring of the investments in the Fund's portfolio and certain other
services necessary for the management of the portfolio. First Trust serves as
advisor or sub-advisor for seven mutual fund portfolios, ten exchange-traded
trusts consisting of 114 series and 15 closed-end funds and is also the
portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios L.P. ("FTP").
PORTFOLIO MANAGEMENT TEAM
JEREMIAH CHARLES - VICE PRESIDENT, PORTFOLIO MANAGER
JIM SNYDER - VICE PRESIDENT, PORTFOLIO MANAGER
COMMENTARY
MARKET RECAP
The long dated maturity segment of the U.S. bond market rallied in 2016, led by
the 30 Year Treasury, which saw its yield decline by 34 basis points ("bps").
The long end outperformed the 5 Year Treasury with a yield curve bull flattening
of 13 bps. The year ended October 31, 2016 began with a significant rally in
intermediate and long maturities and saw ongoing rate volatility as the market
reacted to a wavering Federal Reserve ("Fed") and the shock of Britain's vote to
leave the European Union ("Brexit"). Post-Brexit, the market began to focus on
improving U.S. fundamentals and the risk-off decline in yield slowly dissipated.
Mortgage-backed securities ("MBS") spreads tightened modestly on the year, in 4
bps to close at 15 bps option-adjusted spread ("OAS").
PERFORMANCE ANALYSIS
During the year ended October 31, 2016, the First Trust Low Duration
Opportunities Fund (the "Fund") returned 7.49% at NAV. Since the Fund's November
4, 2014 inception, the Fund has returned 5.57% on an average annual basis at
NAV.
During the year ended October 31, 2016, the BofA Merrill Lynch 1-5 Year US
Treasury & Agency Index (GVA0) (the "Index") returned 1.54%. Since the Fund's
inception, the Index has returned 1.50% on an average annual basis.
The Fund's weighted average effective duration during the year ended October 31,
2016, ranged from a low of 1.66 years to a high of 2.49 years.
In 2016, the Fund outperformed the Index by 5.95% net of fees on an NAV basis
and has cumulatively outperformed the Index by 4.07% on an average annual basis
since inception. Although we maintained a defensive duration in the portfolio
relative to the mortgage benchmark during 2016, the Fund was able to outperform
by reducing MBS basis exposure, rotating some MBS exposure out of the Index and
into higher-coupon, lower-duration pools, maintaining higher cash balances, and
increasing its allocation to shorter, high-yielding and high credit quality
Non-Agency RMBS & CMBS. In addition, the portfolio benefited from out-of-Index
investments in longer maturity treasuries, which benefited from the flatter
yield curve shifts over the year.
MARKET OUTLOOK
The year ended October 31, 2016 saw the Fed delay interest rate policy
normalization, possibly focused on political events and their corresponding
impacts on capital markets. Brexit created a very short-term market dislocation
but was very quickly reversed. We believe that the Fed will finally begin
increasing the funding rate with a potential of four hikes during the 2016-2017
period. The labor markets have tightened substantially over the past year, now
accompanied by the long-awaited income and wage growth. The numerous goal posts
that the Fed has set as obstacles to policy normalization seem to have been met,
and therefore we now see an impatient committee that is signaling to the
financial markets to be prepared for monetary tightening. We believe we are
ready for the new regime.
Given our views and outlook on the markets, we plan to continue to manage the
fund defensively versus the Index from a duration standpoint while maintaining
our ongoing strategy of barbelling our duration across the yield curve with
higher yielding, out-of-Index assets allocated on the short end. We continue to
be bearish on the MBS Index and as such anticipate maintaining an underweight on
the MBS basis.
Page 5
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust Low Duration Opportunities ETF (the "Fund"), you
incur two types of costs: (1) transaction costs; and (2) ongoing costs,
including management fees, distribution and/or service fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
--------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX MONTH SIX MONTH
MAY 1, 2016 OCTOBER 31, 2016 PERIOD PERIOD (a)
--------------------------------------------------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
Actual $1,000.00 $1,038.50 0.65% $3.33
Hypothetical (5% return before expenses) $1,000.00 $1,021.87 0.65% $3.30
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (May 1,
2016 through October 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 85.2%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 31.9%
Federal Home Loan Mortgage Corporation
$ 2,122 Series 1989-74, Class F...................................... 6.00% 10/15/20 $ 2,211
52 Series 1990-172, Class J..................................... 7.00% 07/15/21 53
119 Series 1990-186, Class E..................................... 6.00% 08/15/21 124
237 Series 1990-188, Class H..................................... 7.00% 09/15/21 251
147,189 Series 1992-133, Class B, IO, STRIPS......................... 8.50% 06/01/22 26,493
7,262 Series 1992-205, Class A (a)................................. 0.98% 05/15/23 7,299
45,877 Series 1993-1498, Class I (a)................................ 1.68% 04/15/23 46,940
35,662 Series 1993-1552, Class I (a)................................ 1.01% 08/15/23 35,419
1,076 Series 1993-1577, Class PK................................... 6.50% 09/15/23 1,170
223,695 Series 1993-1630, Class PK................................... 6.00% 11/15/23 244,406
2,654 Series 1993-1643, Class PK................................... 6.50% 12/15/23 2,903
3,964 Series 1998-2089, Class PJ, IO............................... 7.00% 10/15/28 451
20,203 Series 1998-2102, Class Z.................................... 6.00% 12/15/28 22,867
220 Series 2001-2390, Class WD................................... 5.50% 12/15/16 220
89,327 Series 2002-48, Class 1A (a)................................. 5.38% 07/25/33 105,906
150,747 Series 2002-2410, Class OG................................... 6.38% 02/15/32 193,441
271,879 Series 2002-2427, Class GE................................... 6.00% 03/15/32 314,217
7,545 Series 2002-2519, Class AH................................... 5.00% 11/15/17 7,658
25,985 Series 2003-58, Class 2A..................................... 6.50% 09/25/43 30,557
288,422 Series 2003-225, Class PO, PO, STRIPS........................ (b) 11/01/33 243,499
87,010 Series 2003-2557, Class HL................................... 5.30% 01/15/33 96,681
168,230 Series 2003-2564, Class AC................................... 5.50% 02/15/33 191,955
737,766 Series 2003-2574, Class PE................................... 5.50% 02/15/33 836,569
1,247,000 Series 2003-2581, Class LL................................... 5.25% 03/15/33 1,416,617
1,281 Series 2003-2586, Class ND................................... 4.50% 03/15/18 1,304
490,000 Series 2003-2613, Class LL................................... 5.00% 05/15/33 557,885
250,910 Series 2003-2626, Class ZX................................... 5.00% 06/15/33 311,923
1,229 Series 2003-2646, Class MX................................... 4.00% 11/15/32 1,229
822,178 Series 2004-2793, Class PE................................... 5.00% 05/15/34 912,462
61,396 Series 2004-2863, Class PO, PO............................... (b) 10/15/31 60,531
382,564 Series 2004-2890, Class ZA................................... 5.00% 11/15/34 426,165
639,200 Series 2004-2907, Class DZ................................... 4.00% 12/15/34 669,992
261,158 Series 2005-232, Class IO, IO, STRIPS........................ 5.00% 08/01/35 57,060
1,140,533 Series 2005-234, Class IO, IO, STRIPS........................ 4.50% 10/01/35 177,259
296,079 Series 2005-3031, Class BI, IO (a)........................... 6.16% 08/15/35 70,436
16,383 Series 2005-3074, Class ZH................................... 5.50% 11/15/35 21,121
1,389 Series 2005-3076, Class PG................................... 5.50% 10/15/34 1,395
23,423 Series 2005-3077, Class TO, PO............................... (b) 04/15/35 21,422
268,612 Series 2006-72, Class A1 (a)................................. 0.73% 03/25/36 264,873
163,428 Series 2006-237, Class PO, PO, STRIPS........................ (b) 05/15/36 148,782
934,386 Series 2006-238, Class 8, IO, STRIPS......................... 5.00% 04/15/36 166,724
741,089 Series 2006-243, Class 11, IO, STRIPS (a).................... 7.28% 08/15/36 212,297
29,417 Series 2006-3100, Class PO, PO............................... (b) 01/15/36 27,491
450,108 Series 2006-3114, Class GI, IO (a)........................... 6.07% 02/15/36 107,197
179,566 Series 2006-3117, Class EO, PO............................... (b) 02/15/36 164,031
20,010 Series 2006-3117, Class OK, PO............................... (b) 02/15/36 17,545
26,774 Series 2006-3117, Class ZU................................... 6.00% 02/15/36 34,331
7,536 Series 2006-3122, Class ZW................................... 6.00% 03/15/36 9,739
9,916 Series 2006-3134, Class PO, PO............................... (b) 03/15/36 9,214
22,081 Series 2006-3138, Class PO, PO............................... (b) 04/15/36 19,842
71,175 Series 2006-3150, Class DZ................................... 5.50% 05/15/36 80,673
See Notes to Financial Statements Page 7
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corporation (Continued)
$ 485,725 Series 2006-3152, Class MO, PO............................... (b) 03/15/36 $ 459,599
189,552 Series 2006-3200, Class PO, PO............................... (b) 08/15/36 172,628
132,345 Series 2007-3274, Class B.................................... 6.00% 02/15/37 146,277
168,332 Series 2007-3314, Class OW, PO............................... (b) 05/15/37 150,204
367 Series 2007-3317, Class PG................................... 5.00% 04/15/36 371
37,404 Series 2007-3340, Class PF (a)............................... 0.83% 07/15/37 37,264
4,865 Series 2007-3346, Class FA (a)............................... 0.76% 02/15/19 4,860
424 Series 2007-3347, Class PF (a)............................... 0.88% 01/15/36 424
68,057 Series 2007-3349, Class MY................................... 5.50% 07/15/37 76,859
66,463 Series 2007-3373, Class TO, PO............................... (b) 04/15/37 63,097
275,389 Series 2007-3403, Class OB, PO............................... (b) 12/15/37 254,359
425,829 Series 2008-3420, Class AZ................................... 5.50% 02/15/38 494,571
91,851 Series 2009-3523, Class SD (a)............................... 18.19% 06/15/36 126,778
542,739 Series 2009-3542, Class ZP................................... 5.00% 06/15/39 662,284
50,000 Series 2009-3550, Class LL................................... 4.50% 07/15/39 58,386
783,145 Series 2009-3571, Class SB, IO (a)........................... 5.57% 09/15/34 66,350
156,921 Series 2009-3607, Class BO, PO............................... (b) 04/15/36 148,333
14,504 Series 2009-3611, Class PO, PO............................... (b) 07/15/34 13,759
198,648 Series 2010-3637, Class LJ................................... 3.50% 02/15/25 203,861
57,000 Series 2010-3645, Class WD................................... 4.50% 02/15/40 65,715
661,000 Series 2010-3667, Class PL................................... 5.00% 05/15/40 764,339
47,543 Series 2010-3699, Class FD (a)............................... 1.13% 07/15/40 47,836
146,714 Series 2010-3699, Class QI, IO............................... 5.50% 02/15/39 7,350
200,000 Series 2010-3714, Class PB................................... 4.75% 08/15/40 237,760
324,694 Series 2010-3735, Class JI, IO............................... 4.50% 10/15/30 46,430
651 Series 2010-3740, Class KC................................... 4.00% 07/15/37 652
661,092 Series 2010-3740, Class SC, IO (a)........................... 5.47% 10/15/40 111,114
41,610 Series 2010-3752, Class KF (a)............................... 1.03% 12/15/37 41,813
64,977 Series 2010-3770, Class GZ................................... 4.50% 10/15/40 76,246
285,000 Series 2010-3780, Class AV................................... 4.00% 04/15/31 316,870
122,558 Series 2011-3785, Class LS (a)............................... 8.83% 01/15/41 151,226
3,547 Series 2011-3795, Class ED................................... 3.00% 10/15/39 3,650
10,148 Series 2011-3795, Class KA................................... 4.00% 11/15/24 10,163
15,823 Series 2011-3820, Class DA................................... 4.00% 11/15/35 16,284
171,764 Series 2011-3820, Class GZ................................... 5.00% 03/15/41 208,934
300,000 Series 2011-3820, Class NC................................... 4.50% 03/15/41 349,119
26,167 Series 2011-3824, Class FA (a)............................... 0.68% 03/15/26 26,107
104,489 Series 2011-3828, Class SY (a)............................... 11.60% 02/15/41 150,929
54,597 Series 2011-3842, Class BS (a)............................... 20.11% 04/15/41 111,998
300,000 Series 2011-3844, Class PC................................... 5.00% 04/15/41 355,798
170,341 Series 2011-3860, Class PZ................................... 5.00% 05/15/41 210,681
98,853 Series 2011-3862, Class TO, PO............................... (b) 05/15/41 93,004
53,544 Series 2011-3864, Class FW (a)............................... 0.93% 02/15/41 53,798
400,000 Series 2011-3890, Class ME................................... 5.00% 07/15/41 478,112
172,831 Series 2011-3902, Class MA................................... 4.50% 07/15/39 179,138
251,298 Series 2011-3925, Class ZD................................... 4.50% 09/15/41 305,751
4,556,664 Series 2011-3926, Class SH, IO (a)........................... 6.02% 05/15/40 554,347
1,616,215 Series 2012-267, Class S5, IO, STRIPS (a).................... 5.47% 08/15/42 316,553
206,919 Series 2012-278, Class F1, STRIPS (a)........................ 0.98% 09/15/42 207,742
678,000 Series 2012-4000, Class PY................................... 4.50% 02/15/42 790,244
19,000 Series 2012-4012, Class GC................................... 3.50% 06/15/40 20,164
Page 8 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corporation (Continued)
$ 39,704 Series 2012-4015, Class KB................................... 1.75% 05/15/41 $ 36,080
1,259,572 Series 2012-4021, Class IP, IO............................... 3.00% 03/15/27 115,227
878,979 Series 2012-4026, Class GZ................................... 4.50% 04/15/42 1,069,592
1,788,600 Series 2012-4030, Class IL, IO............................... 3.50% 04/15/27 184,698
285,216 Series 2012-4038, Class CS (a)............................... 10.42% 04/15/42 321,160
7,033,624 Series 2012-4054, Class AI, IO............................... 3.00% 04/15/27 643,606
24,954 Series 2012-4076, Class QB................................... 1.75% 11/15/41 24,813
512,965 Series 2012-4090, Class YZ................................... 4.50% 08/15/42 628,258
111,354 Series 2012-4097, Class ES, IO (a)........................... 5.57% 08/15/42 21,980
747,000 Series 2012-4098, Class PE................................... 4.00% 08/15/42 848,745
1,183,226 Series 2012-4103, Class HI, IO............................... 3.00% 09/15/27 102,212
115,873 Series 2012-4116, Class AS, IO (a)........................... 5.62% 10/15/42 23,163
5,717,158 Series 2012-4132, Class AI, IO............................... 4.00% 10/15/42 1,023,300
1,549,769 Series 2012-4136, Class TU, IO (a)........................... 4.50% 08/15/42 257,066
625,109 Series 2012-4145, Class YI, IO............................... 3.00% 12/15/27 50,714
1,202,578 Series 2013-299, Class S1, IO, STRIPS (a).................... 5.47% 01/15/43 259,335
1,707,882 Series 2013-304, Class C37, IO, STRIPS....................... 3.50% 12/15/27 191,162
5,722,770 Series 2013-304, Class C40, IO, STRIPS....................... 3.50% 09/15/26 490,142
702,650 Series 2013-4177, Class GL................................... 3.00% 03/15/33 731,667
1,485,091 Series 2013-4213, Class MZ................................... 4.00% 06/15/43 1,662,801
700,000 Series 2013-4247, Class AY................................... 4.50% 09/15/43 822,011
122,589 Series 2013-4261, Class GS (a)............................... 9.51% 01/15/41 142,882
1,075,427 Series 2013-4278, Class HI, IO............................... 4.00% 12/15/28 114,662
831,676 Series 2014-326, Class S2, IO, STRIPS (a).................... 5.42% 03/15/44 186,147
140,379 Series 2014-4316, Class XZ................................... 4.50% 03/15/44 166,114
203,067 Series 2014-4352, Class ZX................................... 4.00% 04/15/44 225,107
344,229 Series 2015-4520, Class AI, IO............................... 3.50% 10/15/35 54,465
504,529 Series 2015-4522, Class JZ................................... 2.00% 01/15/45 482,980
219,897 Series 2016-4546, Class PZ................................... 4.00% 12/15/45 235,859
372,231 Series 2016-4546, Class ZT................................... 4.00% 01/15/46 403,054
5,122,570 Series 2016-4559, Class ML................................... 3.50% 10/15/27 5,144,829
114,259 Series 2016-4568, Class MZ................................... 4.00% 04/15/46 124,756
4,608,410 Series 2016-4591, Class GI, IO............................... 4.00% 12/15/44 816,672
771,702 Series 2016-4600, Class WT................................... 3.50% 07/15/36 831,636
1,490,237 Series 2016-4615, Class GT (a)............................... 4.00% 10/15/42 1,552,316
Federal National Mortgage Association
79,299 Series 1989-81, Class G...................................... 9.00% 11/25/19 83,401
451 Series 1990-11, Class G...................................... 6.50% 02/25/20 467
26,463 Series 1990-13, Class E...................................... 9.00% 02/25/20 28,635
87,910 Series 1990-79, Class J...................................... 9.00% 07/25/20 94,310
54,105 Series 1990-98, Class J...................................... 9.00% 08/25/20 57,845
1,629 Series 1990-108, Class G..................................... 7.00% 09/25/20 1,735
2,101 Series 1990-109, Class J..................................... 7.00% 09/25/20 2,203
32,032 Series 1990-112, Class G..................................... 8.50% 09/25/20 34,394
130,408 Series 1991-30, Class PN..................................... 9.00% 10/25/21 138,451
539 Series 1992-44, Class ZQ..................................... 8.00% 07/25/22 556
15,029 Series 1992-185, Class ZB.................................... 7.00% 10/25/22 16,456
1,678 Series 1993-3, Class K....................................... 7.00% 02/25/23 1,843
35,447 Series 1993-39, Class Z...................................... 7.50% 04/25/23 39,670
3,959 Series 1993-46, Class FH (a)................................. 1.28% 04/25/23 3,906
114,621 Series 1993-214, Class 2, IO, STRIPS......................... 7.50% 03/25/23 17,899
See Notes to Financial Statements Page 9
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 925,017 Series 1993-222, Class 2, IO, STRIPS......................... 7.00% 06/25/23 $ 140,520
52,075 Series 1993-230, Class FA (a)................................ 1.13% 12/25/23 52,215
667 Series 1994-24, Class H, PO.................................. (b) 11/25/23 638
111,967 Series 1996-51, Class AY, IO................................. 7.00% 12/18/26 23,383
144,833 Series 1997-10, Class SA, IO (a)............................. 8.36% 03/18/27 34,167
23,714 Series 1998-37, Class VZ..................................... 6.00% 06/17/28 25,969
22,927 Series 1999-49, Class SC, IO (a)............................. 7.37% 10/25/17 411
1,478,401 Series 2000-45, Class SD, IO (a)............................. 7.41% 12/18/30 299,628
20,347 Series 2001-8, Class SE, IO (a).............................. 8.07% 02/17/31 1,643
458,481 Series 2001-34, Class SR, IO (a)............................. 7.56% 08/18/31 66,718
5,725 Series 2001-42, Class SB (a)................................. 8.50% 09/25/31 7,253
35,737 Series 2001-46, Class F (a).................................. 0.94% 09/18/31 35,705
18,685 Series 2001-314, Class 1, PO, STRIPS......................... (b) 07/25/31 16,965
6,058 Series 2002-22, Class G...................................... 6.50% 04/25/32 6,778
225,444 Series 2002-30, Class Z...................................... 6.00% 05/25/32 259,955
618 Series 2002-74, Class LE..................................... 5.00% 11/25/17 626
223,901 Series 2002-320, Class 2, IO, STRIPS......................... 7.00% 04/25/32 61,142
239,167 Series 2002-323, Class 6, IO, STRIPS......................... 6.00% 01/25/32 46,426
650,074 Series 2002-324, Class 2, IO, STRIPS......................... 6.50% 07/25/32 150,807
277,421 Series 2002-329, Class 1, PO, STRIPS......................... (b) 01/25/33 252,817
7,502 Series 2003-21, Class OA..................................... 4.00% 03/25/33 7,854
189,897 Series 2003-32, Class UI, IO................................. 6.00% 05/25/33 47,010
42,669 Series 2003-38, Class FA (a)................................. 0.90% 03/25/23 42,660
437,000 Series 2003-45, Class JB..................................... 5.50% 06/25/33 490,300
84,859 Series 2003-63, Class F1 (a)................................. 0.83% 11/25/27 85,334
48,433 Series 2003-109, Class YB.................................... 6.00% 11/25/33 57,234
76,352 Series 2003-119, Class ME.................................... 4.50% 04/25/33 78,299
871,567 Series 2003-343, Class 2, IO, STRIPS......................... 4.50% 10/25/33 166,134
134,063 Series 2003-348, Class 17, IO, STRIPS........................ 7.50% 12/25/33 34,130
182,555 Series 2003-348, Class 18, IO, STRIPS (a).................... 7.50% 12/25/33 46,837
122,266 Series 2003-W1, Class 1A1 (a)................................ 5.61% 12/25/42 137,816
35,503 Series 2003-W10, Class 1A4................................... 4.51% 06/25/43 38,169
133,577 Series 2003-W12, Class 1A8................................... 4.55% 06/25/43 145,448
249,411 Series 2004-25, Class LC..................................... 5.50% 04/25/34 281,115
224,033 Series 2004-25, Class UC..................................... 5.50% 04/25/34 256,368
31,770 Series 2004-28, Class ZH..................................... 5.50% 05/25/34 41,335
10,679 Series 2004-36, Class TA..................................... 5.50% 08/25/33 11,193
25,000 Series 2004-60, Class AC..................................... 5.50% 04/25/34 28,717
2,403 Series 2004-60, Class JB..................................... 5.50% 04/25/34 2,395
672,260 Series 2004-W4, Class A7..................................... 5.50% 06/25/34 746,251
25,229 Series 2004-W9, Class 1A3.................................... 6.05% 02/25/44 29,634
900,000 Series 2004-W10, Class A6.................................... 5.75% 08/25/34 1,030,616
1,049,417 Series 2005-2, Class TB, IO (a).............................. 0.40% 07/25/33 15,455
44,560 Series 2005-29, Class ZT..................................... 5.00% 04/25/35 51,201
240,849 Series 2005-40, Class SA, IO (a)............................. 6.17% 05/25/35 48,086
120,271 Series 2005-45, Class SR, IO (a)............................. 6.19% 06/25/35 25,138
1,310 Series 2005-48, Class AR..................................... 5.50% 02/25/35 1,378
10,501 Series 2005-48, Class MD..................................... 5.00% 04/25/34 10,658
21,464 Series 2005-67, Class SC (a)................................. 13.26% 08/25/35 28,816
17,208 Series 2005-68, Class BC..................................... 5.25% 06/25/35 18,191
8,499 Series 2005-70, Class KJ..................................... 5.50% 09/25/34 8,804
Page 10 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 130,740 Series 2005-79, Class NS, IO (a)............................. 5.56% 09/25/35 $ 24,112
28,900 Series 2005-87, Class SC (a)................................. 12.94% 10/25/35 41,610
13,265 Series 2005-90, Class ES (a)................................. 15.54% 10/25/35 17,796
40,564 Series 2005-95, Class WZ..................................... 6.00% 11/25/35 56,647
149,629 Series 2005-102, Class DS (a)................................ 18.33% 11/25/35 216,103
398,250 Series 2005-359, Class 6, IO, STRIPS......................... 5.00% 11/25/35 96,176
319,842 Series 2005-362, Class 13, IO, STRIPS........................ 6.00% 08/25/35 65,062
41,929 Series 2005-W1, Class 1A2.................................... 6.50% 10/25/44 49,231
117,209 Series 2006-5, Class 2A2 (a)................................. 0.67% 02/25/35 124,316
175,413 Series 2006-8, Class WQ, PO.................................. (b) 03/25/36 158,101
156,914 Series 2006-15, Class IS, IO (a)............................. 6.05% 03/25/36 34,080
44,439 Series 2006-22, Class AO, PO................................. (b) 04/25/36 40,436
25,288 Series 2006-27, Class OH, PO................................. (b) 04/25/36 23,779
18,747 Series 2006-31, Class PZ..................................... 6.00% 05/25/36 26,071
80,873 Series 2006-42, Class CF (a)................................. 0.98% 06/25/36 80,936
17,014 Series 2006-44, Class GO, PO................................. (b) 06/25/36 15,984
59,155 Series 2006-44, Class P, PO.................................. (b) 12/25/33 55,963
56,955 Series 2006-60, Class CO, PO................................. (b) 06/25/35 55,720
120,726 Series 2006-60, Class DO, PO................................. (b) 04/25/35 117,466
27,952 Series 2006-65, Class QO, PO................................. (b) 07/25/36 25,527
16,028 Series 2006-79, Class DO, PO................................. (b) 08/25/36 15,012
187,001 Series 2006-91, Class PO, PO................................. (b) 09/25/36 163,715
47,202 Series 2006-110, Class PO, PO................................ (b) 11/25/36 44,759
1,544 Series 2006-126, Class DZ.................................... 5.50% 01/25/37 1,654
45,034 Series 2006-377, Class 1, PO, STRIPS......................... (b) 10/25/36 38,149
59,152 Series 2007-14, Class OP, PO................................. (b) 03/25/37 54,521
153,506 Series 2007-25, Class FB (a)................................. 0.86% 04/25/37 152,932
4,043,068 Series 2007-28, Class ZA..................................... 6.00% 04/25/37 4,474,322
72,821 Series 2007-32, Class KT..................................... 5.50% 04/25/37 81,081
358,002 Series 2007-60, Class ZS..................................... 4.75% 07/25/37 446,038
97,543 Series 2007-67, Class SA, IO (a)............................. 6.22% 04/25/37 5,942
740,157 Series 2007-116, Class PB.................................... 5.50% 08/25/35 839,436
110,506 Series 2008-3, Class FZ (a).................................. 1.08% 02/25/38 114,805
15,474 Series 2008-8, Class ZA...................................... 5.00% 02/25/38 17,857
50,585 Series 2008-17, Class IP, IO................................. 6.50% 02/25/38 8,477
11,941 Series 2008-51, Class B...................................... 4.50% 06/25/23 12,200
218,397 Series 2009-14, Class BS, IO (a)............................. 5.72% 03/25/24 18,885
300,000 Series 2009-50, Class GX..................................... 5.00% 07/25/39 356,119
114,114 Series 2009-70, Class CO, PO................................. (b) 01/25/37 103,684
395,523 Series 2009-86, Class OT, PO................................. (b) 10/25/37 358,249
47,000 Series 2009-92, Class DB..................................... 5.00% 11/25/39 57,068
53,267 Series 2009-106, Class SN, IO (a)............................ 5.72% 01/25/40 10,520
213,431 Series 2009-109, Class PZ.................................... 4.50% 01/25/40 262,211
268,885 Series 2009-115, Class HZ.................................... 5.00% 01/25/40 288,246
3,524,320 Series 2009-397, Class 2, IO, STRIPS......................... 5.00% 09/25/39 729,742
1,706,827 Series 2009-398, Class C13, IO, STRIPS....................... 4.00% 06/25/24 146,224
200,000 Series 2010-2, Class LC...................................... 5.00% 02/25/40 233,326
105,625 Series 2010-3, Class DZ...................................... 4.50% 02/25/40 127,491
345,362 Series 2010-19, Class MI, IO................................. 5.00% 03/25/39 14,165
641,138 Series 2010-21, Class KO, PO................................. (b) 03/25/40 611,574
28,996 Series 2010-49, Class SC (a)................................. 11.59% 03/25/40 37,086
See Notes to Financial Statements Page 11
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 551,650 Series 2010-106, Class BI, IO................................ 3.50% 09/25/20 $ 23,542
299,847 Series 2010-117, Class EO, PO................................ (b) 10/25/40 278,383
8,324 Series 2010-123, Class HA.................................... 2.50% 03/25/24 8,384
777,207 Series 2010-129, Class SM, IO (a)............................ 5.47% 11/25/40 138,376
887,518 Series 2010-137, Class IM, IO................................ 5.00% 10/25/38 69,407
3,261 Series 2010-145, Class PE.................................... 3.25% 10/25/24 3,351
670,144 Series 2011-9, Class AZ...................................... 5.00% 05/25/40 752,198
1,000,542 Series 2011-30, Class LS, IO (a)............................. 1.87% 04/25/41 75,666
99,095 Series 2011-30, Class ZB..................................... 5.00% 04/25/41 122,042
63,026 Series 2011-60, Class OA, PO................................. (b) 08/25/39 60,106
42,415 Series 2011-70, Class NK..................................... 3.00% 04/25/37 43,012
416,216 Series 2011-72, Class TI, IO................................. 4.00% 09/25/40 23,308
659,658 Series 2011-86, Class DI, IO................................. 3.50% 09/25/21 37,932
60,574 Series 2011-90, Class QI, IO................................. 5.00% 05/25/34 4,826
750,000 Series 2011-105, Class MB.................................... 4.00% 10/25/41 833,037
307,942 Series 2011-111, Class PZ.................................... 4.50% 11/25/41 367,295
649 Series 2011-134, Class PA.................................... 4.00% 09/25/40 666
901,580 Series 2011-141, Class EI, IO................................ 3.00% 07/25/21 30,427
1,317,462 Series 2012-14, Class HS, IO (a)............................. 5.92% 03/25/42 249,943
102,930 Series 2012-52, Class BZ..................................... 4.00% 05/25/42 118,870
787,606 Series 2012-66, Class DI, IO................................. 3.50% 06/25/27 83,486
1,343,396 Series 2012-101, Class AI, IO................................ 3.00% 06/25/27 121,314
1,769,334 Series 2012-114, Class HS, IO (a)............................ 5.62% 03/25/40 228,451
13,779,933 Series 2012-118, Class DI, IO................................ 3.50% 01/25/40 1,377,777
302,995 Series 2012-118, Class IB, IO................................ 3.50% 11/25/42 52,710
1,509,244 Series 2012-122, Class SD, IO (a)............................ 5.57% 11/25/42 330,591
1,789,666 Series 2012-134, Class GI, IO................................ 4.50% 03/25/29 351,885
1,698,676 Series 2012-149, Class CI, IO................................ 3.00% 01/25/28 147,037
269,185 Series 2012-409, Class C17, IO, STRIPS....................... 4.00% 11/25/41 46,458
1,825,716 Series 2013-13, Class IK, IO................................. 2.50% 03/25/28 154,791
33,484 Series 2013-23, Class ZB..................................... 3.00% 03/25/43 39,569
7,000 Series 2013-35, Class LP..................................... 3.00% 01/25/43 7,183
3,073,810 Series 2013-43, Class IX, IO................................. 4.00% 05/25/43 665,064
1,915,725 Series 2013-55, Class AI, IO................................. 3.00% 06/25/33 251,838
110,503 Series 2013-70, Class JZ..................................... 3.00% 07/25/43 111,947
195,852 Series 2013-106, Class KN.................................... 3.00% 10/25/43 198,462
8,844,573 Series 2013-417, Class C21, IO, STRIPS....................... 4.00% 12/25/42 1,480,152
477,084 Series 2014-29, Class GI, IO................................. 3.00% 05/25/29 53,033
6,068,801 Series 2014-44, Class NI, IO................................. 4.50% 08/25/29 714,930
708,172 Series 2014-68, Class GI, IO................................. 4.50% 10/25/43 108,332
4,506,417 Series 2014-84, Class LI, IO................................. 3.50% 12/25/26 463,604
225,000 Series 2015-16, Class MY..................................... 3.50% 04/25/45 235,694
5,766,042 Series 2015-76, Class BI, IO................................. 4.00% 10/25/39 671,970
13,861,489 Series 2015-97, Class AI, IO................................. 4.00% 09/25/41 2,009,130
Government National Mortgage Association
138,349 Series 1999-30, Class S, IO (a).............................. 8.07% 08/16/29 32,929
944,031 Series 2001-22, Class SE, IO (a)............................. 0.65% 05/16/31 19,322
64,108 Series 2001-60, Class PZ..................................... 6.00% 12/20/31 74,827
193,070 Series 2001-65, Class SH, IO (a)............................. 7.07% 12/16/31 46,530
486,903 Series 2002-7, Class ST, IO (a).............................. 6.97% 08/17/27 105,108
1,086,847 Series 2002-11, Class SQ, IO (a)............................. 1.00% 02/20/32 49,234
Page 12 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Government National Mortgage Association (Continued)
$ 454,950 Series 2002-20, Class LS, IO (a)............................. 1.20% 03/20/32 $ 24,921
94,988 Series 2002-20, Class PM..................................... 4.50% 03/20/32 104,108
150,354 Series 2002-24, Class AG, IO (a)............................. 7.42% 04/16/32 31,838
444,691 Series 2002-45, Class SV, IO (a)............................. 7.57% 06/16/32 105,837
116,501 Series 2002-72, Class ZB..................................... 6.00% 10/20/32 154,130
145,631 Series 2003-4, Class MZ...................................... 5.50% 01/20/33 161,872
900,038 Series 2003-11, Class SM, IO (a)............................. 7.17% 02/16/33 221,545
476,443 Series 2003-42, Class SA, IO (a)............................. 6.07% 07/16/31 80,538
1,856,914 Series 2003-42, Class SH, IO (a)............................. 6.02% 05/20/33 396,793
93,107 Series 2003-62, Class MZ..................................... 5.50% 07/20/33 113,558
92,761 Series 2004-37, Class B...................................... 6.00% 04/17/34 106,649
60,670 Series 2004-49, Class MZ..................................... 6.00% 06/20/34 75,376
5,698 Series 2004-53, Class GE..................................... 5.00% 08/20/32 5,768
125,901 Series 2004-68, Class ZC..................................... 6.00% 08/20/34 144,204
153,421 Series 2004-71, Class ST (a)................................. 7.00% 09/20/34 172,230
621,144 Series 2004-88, Class SM, IO (a)............................. 5.54% 10/16/34 104,539
180,478 Series 2004-105, Class JZ.................................... 5.00% 12/20/34 233,158
44,534 Series 2004-105, Class KA.................................... 5.00% 12/16/34 50,755
179,729 Series 2005-3, Class JZ...................................... 5.00% 01/16/35 200,745
179,729 Series 2005-3, Class KZ...................................... 5.00% 01/16/35 217,241
34,855 Series 2005-7, Class AJ (a).................................. 19.86% 02/16/35 54,580
11,064 Series 2005-41, Class PA..................................... 4.00% 05/20/35 12,096
693,825 Series 2005-93, Class PO, PO................................. (b) 06/20/35 659,751
80,436 Series 2006-38, Class B...................................... 5.50% 08/20/33 81,189
127,934 Series 2006-61, Class ZA..................................... 5.00% 11/20/36 153,012
321,650 Series 2007-16, Class OZ..................................... 6.00% 04/20/37 445,763
387,203 Series 2007-27, Class SD, IO (a)............................. 5.67% 05/20/37 71,153
369,400 Series 2007-42, Class SB, IO (a)............................. 6.22% 07/20/37 74,991
175,237 Series 2007-68, Class NA..................................... 5.00% 11/20/37 195,232
138,674 Series 2007-81, Class FZ (a)................................. 0.88% 12/20/37 138,139
104,351 Series 2008-6, Class CK...................................... 4.25% 10/20/37 107,397
290,710 Series 2008-16, Class PO, PO................................. (b) 02/20/38 259,087
13,970 Series 2008-29, Class PO, PO................................. (b) 02/17/33 13,334
244,613 Series 2008-33, Class XS, IO (a)............................. 7.17% 04/16/38 56,454
509,311 Series 2008-47, Class MI, IO................................. 6.00% 10/16/37 37,094
42,000 Series 2008-54, Class PE..................................... 5.00% 06/20/38 48,407
397 Series 2008-85, Class HP..................................... 4.00% 04/20/38 400
283,639 Series 2009-14, Class KI, IO................................. 6.50% 03/20/39 64,678
124,092 Series 2009-14, Class KS, IO (a)............................. 5.77% 03/20/39 19,583
298,789 Series 2009-25, Class SE, IO (a)............................. 7.07% 09/20/38 59,471
300,715 Series 2009-32, Class SZ..................................... 5.50% 05/16/39 395,458
222,874 Series 2009-59, Class IQ, IO................................. 5.00% 09/20/33 2,207
767,806 Series 2009-69, Class ZB..................................... 6.00% 08/20/39 1,013,694
503,014 Series 2009-72, Class SM, IO (a)............................. 5.72% 08/16/39 93,146
73,904 Series 2009-79, Class OK, PO................................. (b) 11/16/37 69,862
32,451 Series 2009-81, Class TZ..................................... 5.50% 09/20/39 42,518
39,000 Series 2009-94, Class AL..................................... 5.00% 10/20/39 46,003
178,318 Series 2009-106, Class DZ.................................... 5.50% 11/20/39 222,224
36,541 Series 2009-106, Class WZ.................................... 5.50% 11/16/39 49,036
102,307 Series 2009-118, Class KP.................................... 4.50% 05/20/38 105,461
281,835 Series 2010-4, Class SL, IO (a).............................. 5.87% 01/16/40 56,156
See Notes to Financial Statements Page 13
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Government National Mortgage Association (Continued)
$ 42,000 Series 2010-4, Class WA...................................... 3.00% 01/16/40 $ 44,195
45,915 Series 2010-14, Class AO, PO................................. (b) 12/20/32 44,339
252,735 Series 2010-29, Class CB..................................... 5.00% 12/20/38 262,875
29,702 Series 2010-43, Class JA..................................... 3.00% 09/20/37 29,852
1,403,874 Series 2010-50, Class WI, IO................................. 4.50% 10/20/37 35,694
67,000 Series 2010-116, Class BM.................................... 4.50% 09/16/40 80,420
547,091 Series 2010-157, Class OP, PO................................ (b) 12/20/40 484,673
929,443 Series 2010-166, Class DI, IO................................ 4.50% 02/20/39 115,558
102,587 Series 2011-4, Class PZ...................................... 5.00% 01/20/41 125,310
394,734 Series 2011-50, Class PZ..................................... 5.00% 04/20/41 516,752
439,221 Series 2011-63, Class BI, IO................................. 6.00% 02/20/38 56,698
145,213 Series 2011-88, Class DI, IO................................. 4.50% 12/20/37 1,749
2,663,569 Series 2011-112, Class IP, IO................................ 0.50% 08/16/26 34,594
239,265 Series 2011-129, Class CL.................................... 5.00% 03/20/41 286,599
599,906 Series 2011-146, Class EI, IO................................ 5.00% 11/16/41 131,032
150,775 Series 2011-151, Class TB, IO (a)............................ 3.50% 04/20/41 18,116
6,057,878 Series 2012-10, Class LI, IO................................. 3.50% 07/20/40 566,564
13,811,104 Series 2012-143, Class IB, IO................................ 3.50% 12/20/39 1,071,039
258,437 Series 2013-5, Class IA, IO.................................. 3.50% 10/16/42 32,315
327,370 Series 2013-20, Class KI, IO................................. 5.00% 01/20/43 53,826
5,537,424 Series 2013-53, Class OI, IO................................. 3.50% 04/20/43 748,022
865,476 Series 2013-69, Class PI, IO................................. 5.00% 05/20/43 137,686
8,000 Series 2013-117, Class VB.................................... 3.50% 02/20/32 8,485
3,518,643 Series 2013-130, Class WS, IO (a)............................ 5.57% 09/20/43 564,625
688,000 Series 2013-183, Class PB.................................... 4.50% 12/20/43 763,722
202,375 Series 2013-188, Class CF (a)................................ 0.98% 03/20/43 202,865
131,282 Series 2014-91, Class JI, IO................................. 4.50% 01/20/40 16,603
462,554 Series 2014-99, Class HI, IO................................. 4.50% 06/20/44 94,529
246,648 Series 2015-3, Class ZD...................................... 4.00% 01/20/45 276,236
131,076 Series 2015-95, Class IK, IO (a)............................. 1.02% 05/16/37 4,785
394,039 Series 2015-137, Class WA (a)................................ 5.48% 01/20/38 444,595
1,940,149 Series 2015-138, Class MI, IO................................ 4.50% 08/20/44 289,389
740,551 Series 2015-151, Class KW (a)................................ 6.07% 04/20/34 817,040
163,228 Series 2016-16, Class KZ..................................... 3.00% 02/16/46 152,360
3,196,050 Series 2016-75, Class SA, IO (a)............................. 5.47% 05/20/40 489,764
835,855 Series 2016-109, Class ZM.................................... 3.50% 08/20/36 893,360
464,000 Series 2016-141, Class PC.................................... 5.00% 10/20/46 572,948
Vendee Mortgage Trust
118,377 Series 2010-1, Class DA...................................... 4.25% 02/15/35 123,118
---------------
86,408,733
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.3%
Fannie Mae - Aces
50,000 Series 2013-M6, Class 1AC (a).............................. 4.08% 02/25/43 53,894
Government National Mortgage Association
27,250 Series 2013-32, Class A.................................... 1.90% 06/16/36 27,296
532,000 Series 2013-57, Class D (a)................................ 2.35% 06/16/46 492,019
100,000 Series 2013-74, Class AG (a)............................... 2.78% 12/16/53 93,856
30,590 Series 2013-194, Class AE (a).............................. 2.75% 11/16/44 31,043
---------------
698,108
---------------
Page 14 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES -- 53.0%
Federal Home Loan Mortgage Corporation
$ 1,123,927 Pool A47828.................................................. 3.50% 08/01/35 $ 1,186,935
498,009 Pool A47829.................................................. 4.00% 08/01/35 534,484
771,026 Pool A47937.................................................. 5.50% 08/01/35 878,698
152,559 Pool A54675.................................................. 5.50% 01/01/36 174,529
364,113 Pool A65324.................................................. 5.50% 09/01/37 416,146
164,841 Pool A86143.................................................. 5.00% 05/01/39 184,036
54,656 Pool A90319.................................................. 5.00% 12/01/39 61,385
21,098 Pool A93093.................................................. 4.50% 07/01/40 23,278
160,029 Pool A94843.................................................. 4.00% 11/01/40 175,214
617,305 Pool A95441.................................................. 4.00% 12/01/40 670,994
88,557 Pool A96380.................................................. 4.00% 01/01/41 95,614
386,479 Pool A97294.................................................. 4.00% 02/01/41 415,198
10,611 Pool C01310.................................................. 6.50% 03/01/32 12,437
19,243 Pool C01444.................................................. 6.00% 01/01/33 22,122
35,507 Pool C01574.................................................. 5.00% 06/01/33 39,690
33,743 Pool C01848.................................................. 6.00% 06/01/34 39,003
38,249 Pool C03458.................................................. 5.00% 02/01/40 42,336
99,585 Pool C03949.................................................. 3.50% 05/01/42 105,832
145,579 Pool C04269.................................................. 3.00% 10/01/42 150,819
421,923 Pool C91353.................................................. 3.50% 01/01/31 446,492
9,701 Pool G01443.................................................. 6.50% 08/01/32 11,362
42,896 Pool G01737.................................................. 5.00% 12/01/34 47,976
25,587 Pool G01829.................................................. 6.00% 03/01/35 29,612
63,853 Pool G01840.................................................. 5.00% 07/01/35 71,384
175,802 Pool G03072.................................................. 5.00% 11/01/36 196,057
47,560 Pool G04452.................................................. 6.00% 07/01/38 55,427
792,241 Pool G04593.................................................. 5.50% 01/01/37 900,288
56,125 Pool G04632.................................................. 5.00% 11/01/36 62,486
386,858 Pool G04814.................................................. 5.50% 10/01/38 438,664
86,312 Pool G04913.................................................. 5.00% 03/01/38 96,006
75,952 Pool G05173.................................................. 4.50% 11/01/31 83,583
70,931 Pool G05792.................................................. 4.50% 02/01/40 78,224
697,176 Pool G05927.................................................. 4.50% 07/01/40 775,427
21,622 Pool G05938.................................................. 5.00% 01/01/36 23,980
50,418 Pool G06252.................................................. 4.00% 02/01/41 54,431
998,350 Pool G06359.................................................. 4.00% 02/01/41 1,077,741
127,135 Pool G06501.................................................. 4.00% 04/01/41 137,238
239,867 Pool G06687.................................................. 5.00% 07/01/41 270,692
180,317 Pool G06739.................................................. 4.50% 09/01/41 199,122
1,552,319 Pool G07100.................................................. 5.50% 07/01/40 1,782,096
35,792 Pool G07219.................................................. 5.00% 10/01/41 39,584
167,489 Pool G07266.................................................. 4.00% 12/01/42 180,021
1,057,157 Pool G07329.................................................. 4.00% 01/01/43 1,143,393
29,118 Pool G07613.................................................. 6.00% 04/01/39 34,274
780,976 Pool G07683.................................................. 4.00% 03/01/44 849,040
97,758 Pool G07806.................................................. 5.00% 06/01/41 109,276
7,059 Pool G08113.................................................. 6.50% 02/01/36 8,083
19,755 Pool G11880.................................................. 5.00% 12/01/20 20,783
363,516 Pool G12959.................................................. 6.50% 10/01/22 400,331
14,552 Pool G12978.................................................. 5.50% 12/01/22 15,682
728,113 Pool G14106.................................................. 6.00% 10/01/24 791,380
See Notes to Financial Statements Page 15
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal Home Loan Mortgage Corporation (Continued)
$ 756,431 Pool G14791.................................................. 6.00% 05/01/21 $ 770,465
1,674,359 Pool G60114.................................................. 5.50% 06/01/41 1,908,588
87,573 Pool H09034.................................................. 5.50% 05/01/37 95,481
13,460 Pool J03523.................................................. 5.00% 09/01/21 13,984
827,590 Pool N70081.................................................. 5.50% 07/01/38 938,520
146,597 Pool O20138 (a).............................................. 5.00% 11/01/30 162,791
190,104 Pool Q00841.................................................. 4.50% 05/01/41 209,930
204,742 Pool Q03139.................................................. 4.00% 09/01/41 222,166
120,635 Pool Q05035.................................................. 4.00% 12/01/41 130,276
205,075 Pool Q07189.................................................. 4.00% 04/01/42 221,859
67,162 Pool Q07479.................................................. 3.50% 04/01/42 71,126
217,394 Pool Q11791.................................................. 3.50% 10/01/42 230,033
140,410 Pool Q11836.................................................. 3.50% 10/01/42 149,694
116,965 Pool U80068.................................................. 3.50% 10/01/32 124,532
208,758 Pool U80212.................................................. 3.50% 02/01/33 222,281
158,689 Pool U90291.................................................. 4.00% 10/01/42 172,100
972,365 Pool U90316.................................................. 4.00% 10/01/42 1,054,662
723,931 Pool U90690.................................................. 3.50% 06/01/42 768,367
364,844 Pool U90975.................................................. 4.00% 06/01/42 395,872
477,628 Pool U91619.................................................. 4.00% 06/01/43 518,512
88,669 Pool U99091.................................................. 4.50% 03/01/44 98,775
739,285 Pool V80910.................................................. 4.00% 12/01/43 798,012
Federal National Mortgage Association
53,082 Pool 254636.................................................. 5.00% 02/01/33 58,736
79,917 Pool 255190.................................................. 5.50% 05/01/34 91,015
213,372 Pool 256808.................................................. 5.50% 07/01/37 234,456
474,310 Pool 256936.................................................. 6.00% 10/01/37 508,512
46,610 Pool 545759.................................................. 6.50% 07/01/32 54,873
24,588 Pool 555528.................................................. 6.00% 04/01/33 28,593
37,523 Pool 555851.................................................. 6.50% 01/01/33 44,114
156,061 Pool 633673.................................................. 6.00% 06/01/32 179,993
539,260 Pool 654686.................................................. 6.00% 11/01/32 617,701
60,645 Pool 725228.................................................. 6.00% 03/01/34 70,577
54,361 Pool 725690.................................................. 6.00% 08/01/34 63,006
39,114 Pool 725704.................................................. 6.00% 08/01/34 45,434
1,093,303 Pool 735415.................................................. 6.50% 12/01/32 1,282,839
29,399 Pool 735503.................................................. 6.00% 04/01/35 34,097
11,407 Pool 745875.................................................. 6.50% 09/01/36 13,155
784,582 Pool 758670.................................................. 6.00% 09/01/34 929,029
848,302 Pool 788149.................................................. 5.50% 05/01/33 1,006,670
46,247 Pool 831663.................................................. 6.00% 08/01/36 53,062
913,730 Pool 850000.................................................. 5.50% 01/01/36 1,086,282
309,598 Pool 871039.................................................. 5.50% 02/01/37 339,604
37,931 Pool 890149.................................................. 6.50% 10/01/38 43,650
2,026,753 Pool 890556.................................................. 4.50% 10/01/43 2,271,371
81,487 Pool 890588.................................................. 4.50% 09/01/41 89,663
147,374 Pool 912926.................................................. 6.00% 07/01/37 172,675
38,617 Pool 916916.................................................. 6.00% 05/01/37 44,436
412,705 Pool 922386.................................................. 5.50% 01/01/37 453,363
28,070 Pool 930562.................................................. 5.00% 02/01/39 31,800
1,713 Pool 931150.................................................. 5.00% 05/01/39 1,916
Page 16 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association (Continued)
$ 279,066 Pool 931565.................................................. 5.00% 07/01/39 $ 311,475
287,987 Pool 953115.................................................. 5.50% 11/01/38 324,703
146,265 Pool 973561.................................................. 5.00% 03/01/23 156,758
137,318 Pool 976871.................................................. 6.50% 08/01/36 159,603
37,479 Pool 995002.................................................. 5.00% 07/01/37 41,882
44,790 Pool 995097.................................................. 6.50% 10/01/37 51,543
114,942 Pool 995149.................................................. 6.50% 10/01/38 132,289
114,149 Pool 995228.................................................. 6.50% 11/01/38 131,382
48,595 Pool AA0916.................................................. 5.00% 08/01/37 53,956
10,995 Pool AA1740.................................................. 5.00% 01/01/39 12,253
2,838 Pool AA3267.................................................. 5.00% 02/01/39 3,174
200,767 Pool AA3303.................................................. 5.50% 06/01/38 222,475
104,743 Pool AB1576.................................................. 4.00% 10/01/20 108,560
1,092,592 Pool AB1801.................................................. 4.00% 11/01/40 1,182,213
129,758 Pool AB1953.................................................. 4.00% 12/01/40 141,101
94,777 Pool AB2092.................................................. 4.00% 01/01/41 102,851
319,514 Pool AB2265.................................................. 4.00% 02/01/41 349,645
238,644 Pool AB2275.................................................. 4.50% 02/01/41 262,569
51,957 Pool AB2467.................................................. 4.50% 03/01/41 57,493
3,566,760 Pool AB2959.................................................. 4.50% 07/01/40 3,923,393
115,770 Pool AB3284.................................................. 5.00% 07/01/41 129,339
198,289 Pool AB4937.................................................. 3.50% 04/01/42 209,765
205,131 Pool AB5174.................................................. 3.50% 05/01/42 217,678
1,337,634 Pool AB5500.................................................. 3.50% 07/01/42 1,415,106
222,309 Pool AB5919.................................................. 3.00% 08/01/42 230,551
155,716 Pool AB6632.................................................. 3.50% 10/01/42 164,312
434,747 Pool AB6671.................................................. 3.00% 10/01/42 450,598
551,612 Pool AB7765.................................................. 3.00% 02/01/43 571,719
242,992 Pool AB7859.................................................. 3.50% 02/01/43 257,854
312,766 Pool AB8143.................................................. 5.00% 01/01/38 349,801
64,866 Pool AB9382.................................................. 4.00% 05/01/43 70,541
1,483,752 Pool AB9551.................................................. 3.00% 06/01/43 1,537,737
141,365 Pool AB9615.................................................. 4.00% 06/01/33 153,524
92,239 Pool AB9683.................................................. 4.00% 06/01/43 99,800
121,994 Pool AB9959.................................................. 4.00% 07/01/43 132,472
1,719,247 Pool AC2946.................................................. 5.00% 09/01/39 1,925,641
197,860 Pool AC3236.................................................. 5.00% 09/01/39 223,108
646,595 Pool AC3267.................................................. 5.50% 09/01/39 742,347
250,051 Pool AC5446.................................................. 5.00% 11/01/39 280,035
34,274 Pool AD0163.................................................. 6.00% 11/01/34 39,907
40,363 Pool AD0217.................................................. 6.00% 08/01/37 46,997
21,977 Pool AD0440.................................................. 6.00% 10/01/39 25,634
224,714 Pool AD5583.................................................. 5.00% 04/01/40 251,493
149,616 Pool AD6938.................................................. 4.50% 06/01/40 166,119
365,417 Pool AD7110.................................................. 5.00% 07/01/40 407,944
61,860 Pool AD8526.................................................. 4.50% 08/01/40 68,550
427,647 Pool AE0504.................................................. 4.50% 11/01/40 470,827
266,498 Pool AE1798.................................................. 5.00% 09/01/40 298,972
215,900 Pool AE4476.................................................. 4.00% 03/01/41 231,560
316,646 Pool AE7005.................................................. 4.00% 10/01/40 339,761
166,992 Pool AE8075.................................................. 4.00% 12/01/40 180,659
77,193 Pool AE9284.................................................. 4.00% 11/01/40 82,876
See Notes to Financial Statements Page 17
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association (Continued)
$ 38,754 Pool AH0057.................................................. 4.50% 02/01/41 $ 42,828
321,435 Pool AH1089.................................................. 4.00% 11/01/40 345,497
261,545 Pool AH1141.................................................. 4.50% 12/01/40 287,720
33,958 Pool AH1568.................................................. 4.50% 12/01/40 37,404
293,075 Pool AH4404.................................................. 4.00% 01/01/41 314,876
533,747 Pool AH7192.................................................. 5.00% 02/01/41 596,120
195,070 Pool AH7204.................................................. 4.00% 03/01/41 209,641
51,640 Pool AH8090.................................................. 4.50% 06/01/41 56,833
495,111 Pool AH8871.................................................. 5.00% 04/01/41 549,199
75,384 Pool AH9677.................................................. 5.00% 04/01/41 84,194
90,346 Pool AI1190.................................................. 4.50% 04/01/41 99,917
219,492 Pool AI1191.................................................. 4.50% 04/01/41 241,521
113,430 Pool AI1969.................................................. 4.50% 05/01/41 125,753
171,603 Pool AI6503.................................................. 5.00% 11/01/39 190,399
68,709 Pool AI6581.................................................. 4.50% 07/01/41 75,391
56,468 Pool AI7800.................................................. 4.50% 07/01/41 62,061
980,219 Pool AI8448.................................................. 4.50% 08/01/41 1,078,783
553,301 Pool AI9114.................................................. 4.00% 06/01/42 605,295
3,099,397 Pool AI9124.................................................. 4.00% 08/01/42 3,390,650
2,383,907 Pool AI9158.................................................. 6.50% 01/01/41 2,898,597
60,093 Pool AJ5301.................................................. 4.00% 11/01/41 65,008
30,035 Pool AJ8203.................................................. 4.50% 01/01/42 33,319
591,013 Pool AJ9332.................................................. 4.00% 01/01/42 641,790
138,382 Pool AJ9333.................................................. 4.00% 01/01/42 149,744
1,112,804 Pool AK3103.................................................. 4.00% 02/01/42 1,203,714
426,921 Pool AK4520.................................................. 4.00% 03/01/42 458,850
330,919 Pool AK5555.................................................. 4.00% 04/01/42 355,633
31,674 Pool AL0147.................................................. 4.00% 04/01/41 34,659
212,798 Pool AL0913.................................................. 6.00% 07/01/41 246,297
76,169 Pool AL2142.................................................. 6.50% 09/01/38 88,702
2,084,907 Pool AL2392.................................................. 3.50% 08/01/42 2,211,438
962,846 Pool AL2551.................................................. 3.50% 10/01/42 1,018,427
1,164,859 Pool AL3093.................................................. 3.50% 02/01/43 1,241,052
43,999 Pool AL3154.................................................. 3.00% 02/01/43 45,630
110,580 Pool AL3484.................................................. 4.50% 10/01/42 121,745
2,028,350 Pool AL5315.................................................. 4.00% 06/01/42 2,194,636
218,775 Pool AL5760.................................................. 4.00% 09/01/43 237,532
1,146,273 Pool AL5890.................................................. 4.50% 03/01/43 1,286,253
148,174 Pool AL6167.................................................. 3.50% 01/01/44 157,315
338,116 Pool AL8139.................................................. 4.00% 02/01/32 363,510
91,046 Pool AO2976.................................................. 3.50% 05/01/42 96,347
8,029,939 Pool AO3529.................................................. 4.00% 06/01/42 8,724,230
92,929 Pool AO4133.................................................. 3.50% 06/01/42 98,628
272,687 Pool AP0495.................................................. 3.50% 08/01/42 288,452
46,555 Pool AP4795.................................................. 3.50% 09/01/42 49,255
203,845 Pool AP5113.................................................. 4.00% 09/01/42 221,410
240,728 Pool AP7963.................................................. 4.00% 09/01/42 263,642
1,732,893 Pool AQ0535.................................................. 3.00% 11/01/42 1,793,930
663,991 Pool AQ1534.................................................. 3.50% 10/01/32 703,680
2,025,661 Pool AQ1584.................................................. 4.00% 11/01/42 2,226,737
1,450,777 Pool AQ1607.................................................. 3.50% 11/01/32 1,537,685
Page 18 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association (Continued)
$ 115,380 Pool AQ9715.................................................. 3.00% 01/01/43 $ 119,245
789,722 Pool AQ9999.................................................. 3.00% 02/01/43 816,151
76,383 Pool AR4445.................................................. 3.00% 03/01/43 78,942
628,965 Pool AR7961.................................................. 3.50% 03/01/33 666,646
529,479 Pool AS5236.................................................. 4.00% 05/01/45 573,277
1,401,472 Pool AS7211.................................................. 3.00% 04/01/46 1,448,496
3,081,151 Pool AS9194.................................................. 4.50% 12/01/44 3,439,552
292,509 Pool AT0332.................................................. 3.00% 04/01/43 301,357
1,075,657 Pool AT1747.................................................. 3.00% 04/01/43 1,115,402
4,720,238 Pool AT2720.................................................. 3.00% 05/01/43 4,886,481
262,526 Pool AT2887.................................................. 3.50% 04/01/43 277,733
974,995 Pool AT3892.................................................. 3.00% 06/01/43 1,007,643
631,084 Pool AT4180.................................................. 3.50% 05/01/33 668,712
326,636 Pool AT5914.................................................. 3.50% 06/01/43 347,028
210,000 Pool AT5915.................................................. 4.00% 06/01/43 228,155
80,769 Pool AT6306.................................................. 4.00% 06/01/43 88,358
93,079 Pool AT9657.................................................. 4.00% 07/01/43 100,710
400,831 Pool AU3751.................................................. 4.00% 08/01/43 433,694
95,305 Pool AU4386.................................................. 4.00% 10/01/43 103,118
49,472 Pool AW7401.................................................. 5.00% 09/01/40 55,416
882,198 Pool AX5443.................................................. 5.00% 11/01/44 989,863
976,481 Pool BA4113.................................................. 3.00% 04/01/46 1,009,560
1,009,319 Pool BC4490.................................................. 5.00% 05/01/39 1,116,834
3,305,805 Pool MA0443.................................................. 5.00% 05/01/30 3,664,949
102,245 Pool MA1125.................................................. 4.00% 07/01/42 110,998
159,354 Pool MA1177.................................................. 3.50% 09/01/42 169,178
446,821 Pool MA1213.................................................. 3.50% 10/01/42 474,336
629,611 Pool MA1251.................................................. 3.50% 11/01/42 668,428
205,042 Pool MA1328.................................................. 3.50% 01/01/43 217,707
3,636,338 Pool MA1373.................................................. 3.50% 03/01/43 3,861,065
1,000,456 Pool MA1404.................................................. 3.50% 04/01/43 1,062,698
487,755 Pool MA1437.................................................. 3.50% 05/01/43 518,208
1,692,311 Pool MA1463.................................................. 3.50% 06/01/43 1,798,011
162,796 Pool MA1508.................................................. 3.50% 07/01/43 172,951
307,259 Pool MA1510.................................................. 4.00% 07/01/43 333,874
1,460,530 Pool MA1546.................................................. 3.50% 08/01/43 1,551,768
1,321,154 Pool MA1866.................................................. 4.50% 04/01/44 1,475,623
1,069,577 Pool MA1900.................................................. 4.50% 04/01/44 1,194,955
Government National Mortgage Association........................
179,987 Pool 3149.................................................... 6.00% 10/20/31 211,043
112,258 Pool 3172.................................................... 6.00% 12/20/31 128,849
128,361 Pool 3227.................................................... 6.00% 04/20/32 150,986
181,772 Pool 3345.................................................... 5.00% 02/20/33 204,333
134,083 Pool 3389.................................................... 5.00% 05/20/33 150,643
20,763 Pool 3390.................................................... 5.50% 05/20/33 23,592
237,041 Pool 3428.................................................... 5.00% 08/20/33 266,146
31,091 Pool 3459.................................................... 5.50% 10/20/33 35,322
25,462 Pool 3474.................................................... 6.00% 11/20/33 29,872
175,239 Pool 3487.................................................... 5.00% 12/20/33 196,632
320,424 Pool 3529.................................................... 5.00% 03/20/34 359,727
52,368 Pool 3555.................................................... 5.00% 05/20/34 58,805
See Notes to Financial Statements Page 19
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Government National Mortgage Association (Continued)
$ 25,034 Pool 3596.................................................... 5.50% 08/20/34 $ 28,428
51,511 Pool 3786.................................................... 5.50% 11/20/35 58,054
135,941 Pool 553144.................................................. 5.50% 04/15/33 155,612
88,509 Pool 589331.................................................. 6.00% 10/15/22 101,309
179,291 Pool 615403.................................................. 4.50% 08/15/33 201,094
26,151 Pool 627123.................................................. 5.50% 03/15/34 30,306
462,727 Pool 658324.................................................. 5.50% 03/15/37 524,842
61,692 Pool 687833.................................................. 6.00% 08/15/38 70,614
73,495 Pool 706840.................................................. 4.50% 05/15/40 82,943
309,852 Pool 711483.................................................. 4.00% 01/15/40 340,124
223,123 Pool 711543.................................................. 4.00% 11/15/40 245,294
185,107 Pool 723248.................................................. 5.00% 10/15/39 209,949
142,492 Pool 728921.................................................. 4.50% 12/15/24 153,506
546,892 Pool 733595.................................................. 4.50% 04/15/40 616,363
279,984 Pool 733733.................................................. 5.00% 06/15/40 314,486
255,561 Pool 736617.................................................. 4.00% 12/15/35 275,849
518,642 Pool 737996.................................................. 4.00% 02/15/41 569,701
431,006 Pool 743673.................................................. 4.50% 07/15/40 486,914
67,835 Pool 748939.................................................. 4.00% 09/20/40 74,929
31,658 Pool 781328.................................................. 7.00% 09/15/31 34,219
89,543 Pool 781623.................................................. 5.00% 06/15/33 100,503
32,450 Pool 781862.................................................. 5.50% 01/15/35 37,144
78,357 Pool 782810.................................................. 4.50% 11/15/39 87,944
296,369 Pool 783091.................................................. 5.50% 06/15/40 342,196
508,587 Pool 783375.................................................. 5.00% 08/15/41 568,520
32,024 Pool AA6149.................................................. 3.00% 03/20/43 33,465
1,841,301 Pool AN4469.................................................. 5.00% 12/15/40 2,046,890
663,518 Pool MA2077.................................................. 5.50% 07/20/44 750,266
108,429 Pool MA3380.................................................. 5.50% 01/20/46 122,591
927,468 Pool MA3459.................................................. 6.00% 08/20/39 1,043,322
971,522 Pool MA3525.................................................. 5.50% 03/20/46 1,097,814
---------------
143,510,270
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES...................................... 230,617,111
(Cost $227,658,752) ---------------
MORTGAGE-BACKED SECURITIES -- 5.2%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.8%
Adjustable Rate Mortgage Trust
93,065 Series 2004-1, Class 2A1 (a)................................. 3.00% 01/25/35 94,126
Alternative Loan Trust
18,589 Series 2004-3T1, Class A3.................................... 5.00% 05/25/34 18,765
487 Series 2004-J8, Class 4A1.................................... 6.00% 02/25/17 486
American Home Mortgage Investment Trust
13,897 Series 2004-3, Class 6A1 (c)................................. 4.82% 10/25/34 14,092
ASG Resecuritization Trust
12,558 Series 2009-3, Class A65 (a) (d)............................. 2.43% 03/26/37 12,528
Banc of America Alternative Loan Trust
78,900 Series 2004-7, Class 4A1..................................... 5.00% 08/25/19 80,013
Banc of America Funding Trust
29,493 Series 2003-3, Class 2A1..................................... 4.75% 10/25/18 29,649
Page 20 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Banc of America Mortgage Trust
$ 27,130 Series 2004-3, Class 3A1..................................... 5.00% 04/25/19 $ 27,416
17,590 Series 2004-5, Class 3A2..................................... 4.75% 06/25/19 17,722
22,862 Series 2004-5, Class 4A1..................................... 4.75% 06/25/19 22,892
90,156 Series 2005-11, Class 2A1.................................... 5.25% 12/25/20 90,477
BCAP LLC Trust
200 Series 2009-RR4, Class 2A1 (a) (d)........................... 3.21% 07/26/36 200
12,140 Series 2009-RR4, Class 9A1 (a) (d)........................... 2.99% 10/26/35 12,112
77,879 Series 2009-RR5, Class 8A1 (d)............................... 5.50% 11/26/34 80,356
35,633 Series 2009-RR6, Class 2A1 (a) (d)........................... 3.11% 08/26/35 35,400
19,717 Series 2009-RR14, Class 1A1 (a) (d).......................... 6.00% 05/26/37 20,409
217,290 Series 2011-R11, Class 20A5 (a) (d).......................... 3.10% 03/26/35 217,668
70,876 Series 2014-RR1, Class 3A1 (a) (d)........................... 0.69% 03/26/37 70,386
CHL Mortgage Pass-Through Trust
12,092 Series 2004-8, Class 2A1..................................... 4.50% 06/25/19 12,340
641,428 Series 2005-5, Class A2...................................... 5.50% 03/25/35 646,535
Citicorp Mortgage Securities REMIC Pass-Through Certificates
Trust
3,759 Series 2005-5, Class 1A6..................................... 5.50% 08/25/35 3,770
263 Series 2005-5, Class 1A7..................................... 5.50% 08/25/35 263
Citicorp Mortgage Securities Trust
10,632 Series 2006-3, Class 1A2..................................... 6.25% 06/25/36 10,730
Citigroup Global Markets Mortgage Securities VII, Inc.
2,227 Series 2003-UP2, Class PO1, PO............................... (b) 12/25/18 1,903
Citigroup Mortgage Loan Trust
522,487 Series 2009-6, Class 6A1 (a) (d)............................. 0.78% 07/25/36 515,962
4,545 Series 2010-8, Class 5A6 (d)................................. 4.00% 11/25/36 4,559
8,406 Series 2010-8, Class 6A6 (d)................................. 4.50% 12/25/36 8,441
Credit Suisse First Boston Mortgage Securities Corp.
14,811 Series 2003-25, Class 2A1.................................... 4.50% 10/25/18 14,773
15,330 Series 2004-3, Class 2A1..................................... 5.00% 04/25/19 15,495
39,531 Series 2004-5, Class 2A1..................................... 5.00% 08/25/19 40,126
17,661 Series 2004-AR8, Class 2A1 (a)............................... 2.98% 09/25/34 17,441
Credit Suisse Mortgage Capital Certificates
217,009 Series 2009-3R, Class 18A3 (d)............................... 6.00% 11/27/36 218,240
26,804 Series 2009-3R, Class 28A1 (a) (d)........................... 3.20% 08/27/37 26,822
753,985 Series 2009-12R, Class 6A1 (d)............................... 6.00% 05/27/37 750,748
125,607 Series 2009-12R, Class 15A1 (d).............................. 6.00% 05/27/36 126,750
235,393 Series 2009-12R, Class 24A1 (a) (d).......................... 3.10% 10/27/36 233,490
CSFB Mortgage-Backed Trust
5,445 Series 2004-7, Class 6A1..................................... 5.25% 10/25/19 5,505
CSMC
124,008 Series 2009-8R, Class 5A1 (a) (d)............................ 5.71% 05/26/37 124,488
78,588 Series 2009-15R, Class 2A1 (a) (d)........................... 3.10% 10/26/36 79,509
105,996 Series 2011-16R, Class 7A3 (a) (d)........................... 3.25% 12/27/36 106,365
45,670 Series 2012-3R, Class 1A1 (a) (d)............................ 2.74% 07/27/37 45,900
Deutsche Alt-A Securities, Inc. Mortgage Loan Trust
15,388 Series 2005-3, Class 1A1 (a)................................. 4.97% 06/25/20 15,414
FDIC 2010-R1 Trust
485,210 Series 2010-R1, Class A (d).................................. 2.18% 05/25/50 485,692
FDIC Guaranteed Notes Trust
77,886 Series 2010-S2, Class 3A (a) (d)............................. 1.22% 12/29/45 78,052
See Notes to Financial Statements Page 21
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
GMACM Mortgage Loan Trust
$ 10,140 Series 2003-J10, Class A1.................................... 4.75% 01/25/19 $ 10,134
60,866 Series 2004-J6, Class 1A1.................................... 5.00% 01/25/20 62,218
GSR Mortgage Loan Trust
82,565 Series 2004-8F, Class 2A3.................................... 6.00% 09/25/34 84,720
Impac CMB Trust
203,036 Series 2003-4, Class 1A1 (a)................................. 1.17% 10/25/33 197,171
Jefferies Resecuritization Trust
100,097 Series 2009-R2, Class 2A (a) (d)............................. 3.15% 12/26/37 99,771
11,190 Series 2009-R9, Class 1A1 (a) (d)............................ 2.81% 08/26/46 11,269
JP Morgan Resecuritization Trust
248,484 Series 2009-7, Class 2A1 (a) (d)............................. 6.00% 02/27/37 252,900
25,742 Series 2009-7, Class 5A1 (a) (d)............................. 6.00% 02/27/37 25,844
80,923 Series 2009-7, Class 13A1 (a) (d)............................ 2.71% 06/27/37 74,798
85,694 Series 2009-7, Class 14A1 (a) (d)............................ 2.58% 07/27/37 85,817
110,330 Series 2009-7, Class 17A1 (a) (d)............................ 5.56% 07/27/37 109,076
81,909 Series 2009-8, Class A1 (a) (d).............................. 3.29% 04/20/36 82,107
179,651 Series 2010-2, Class 3A3 (d)................................. 6.00% 07/26/36 180,170
340,592 Series 2010-4, Class 4A2 (a) (d)............................. 2.41% 09/26/35 337,755
JPMorgan Mortgage Trust
39,355 Series 2004-S1, Class 1A2.................................... 4.50% 09/25/34 40,084
MASTR Alternative Loan Trust
3,529 Series 2004-8, Class 7A1..................................... 5.00% 09/25/19 3,578
13,711 Series 2004-13, Class 8A1.................................... 5.50% 01/25/25 13,730
MASTR Asset Securitization Trust
8,524 Series 2003-2, Class 1A1 .................................... 5.00% 03/25/18 8,538
17,348 Series 2003-5, Class 2A1 .................................... 5.00% 06/25/18 17,967
30,340 Series 2003-9, Class 5A1 .................................... 4.75% 10/25/18 30,927
27,419 Series 2004-1, Class 30PO, PO................................ (b) 02/25/34 21,490
84,380 Series 2004-3, Class 1A3 .................................... 5.25% 03/25/24 85,089
MASTR Seasoned Securitization Trust
7,648 Series 2005-2, Class 3A1..................................... 6.00% 11/25/17 7,698
Merrill Lynch Mortgage Investors Trust MLCC
17,199 Series 2003-H, Class A3A (a)................................. 2.45% 01/25/29 17,049
Morgan Stanley Mortgage Loan Trust
1,266 Series 2004-1, Class 1A5..................................... 5.00% 11/25/18 1,273
National Mortgage Securities, Inc.
19,864 Series 1998-2, Class B4 (a) (e).............................. 6.75% 06/25/28 20,014
Nomura Asset Acceptance Corp. Alternative Loan Trust
31,582 Series 2005-WF1, Class 2A5 (c)............................... 5.16% 03/25/35 31,946
Prime Mortgage Trust
37,669 Series 2004-1, Class 2A1..................................... 4.50% 08/25/34 38,062
299,425 Series 2004-2, Class A2...................................... 4.75% 11/25/19 300,853
RBSSP Resecuritization Trust
168,841 Series 2009-12, Class 15A1 (a) (d)........................... 3.11% 10/26/35 170,695
45,123 Series 2010-3, Class 9A1 (d)................................. 5.50% 02/26/35 45,548
Residential Accredit Loans, Inc.
72,035 Series 2003-QS20, Class CB................................... 5.00% 11/25/18 72,690
10,093 Series 2004-QS5, Class A1.................................... 4.60% 04/25/34 10,116
Sequoia Mortgage Trust 4
1,971,136 Series 2000-4, Class A (a)................................... 1.26% 11/22/24 1,953,708
Page 22 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
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