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 811-22245
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First Trust Exchange-Traded Fund III
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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
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Wheaton, IL 60187
(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: April 30, 2017
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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. 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 semi-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 III
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First Trust Preferred Securities and Income ETF (FPE)
Semi-Annual Report
For the
Six Months Ended
April 30, 2017
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TABLE OF CONTENTS
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
SEMI-ANNUAL REPORT
APRIL 30, 2017
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 14
Statement of Operations...................................................... 15
Statements of Changes in Net Assets.......................................... 16
Financial Highlights......................................................... 17
Notes to Financial Statements................................................ 18
Additional Information....................................................... 24
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 Stonebridge Advisors LLC ("Stonebridge" 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 III (the "Trust") described in
this report for the First Trust Preferred Securities and 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-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 by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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.
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 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 its prospectus, statement of additional
information, this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2017
Dear Shareholders:
Thank you for your investment in First Trust Preferred Securities and Income ETF
(the "Fund").
The year 2016 was a historic year all over the world. Many will remember some of
the events that occurred during the year: from the Brexit vote in the UK to
leave the European Union, to the results of the U.S. Presidential Election which
seemed unlikely at the beginning of 2016, to the first World Series Championship
for the Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment.
Additionally, First Trust has compiled the Fund's financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
On November 8, 2016, Donald J. Trump was elected to become the 45th president in
our country's history. As I write this, he has just hit his 100th day in office,
always a historic marker for pundits, politicians, and voters. While no one has
a crystal ball and the ability to predict how the Trump administration will
shape the United States (and the world), there is no doubt that his populist
message resonated for many Americans. His message of improving lives for the
"average" American, while reducing the size and scope of the federal government,
also won him millions of votes. Many of his supporters believe that with his
background in business, Trump will make policy changes that will continue to
grow the economy and spur stock markets even higher. Many analysts predicted the
Dow Jones Industrial Average would hit a new benchmark, 20,000, in the first
days of the New Year. It took until January 25, 2017, but the Dow finally traded
over 20,000 on that day. On March 1, 2017, the Dow went past 21,000, a new
record. As with all change and a new administration, only time will tell where
our economy and the markets will go.
As of December 31, 2016, the S&P 500(R) Index (the "Index") was up 11.96% for
the year, on a total return basis, as measured by Bloomberg. As of April 30,
2017, the Index was up 7.16% (calendar year-to-date). The current bull market
(measuring from March 9, 2009 through April 28, 2017) is the second longest in
history, but lags the longest bull market by 4.17 years, according to Bespoke
Investment Group. We remain bullish on the economy, but continue to have a
long-term perspective. We believe investors should think long-term as well,
since no one can predict volatility and the inevitable ups and downs that occur
in the market.
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 our relentless focus
on bringing the types of investments that we believe could help 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 PREFERRED SECURITIES AND INCOME ETF (FPE)
First Trust Preferred Securities and Income ETF's (the "Fund") investment
objective is to seek total return and to provide current income. Under normal
market conditions, the Fund invests at least 80% of its net assets (including
investment borrowings) in preferred securities ("Preferred Securities") and
income-producing debt securities ("Income Securities"). The Fund invests in
securities that are traded over-the-counter or listed on an exchange. For
purposes of the 80% test set forth above, securities of open-end funds,
closed-end funds or other exchange-traded funds ("ETFs") registered under the
Investment Company Act of 1940, as amended, that invest primarily in Preferred
Securities or Income Securities are deemed to be Preferred Securities or Income
Securities.
Preferred Securities held by the Fund generally pay fixed or adjustable-rate
distributions to investors and have preference over common stock in the payment
of distributions and the liquidation of a company's assets, but are generally
junior to all forms of the company's debt, including both senior and
subordinated debt. Certain of the Preferred Securities may be issued by trusts
or other special purpose entities created by companies specifically for the
purpose of issuing such securities. Income Securities that may be held by the
Fund include corporate bonds, high yield securities (commonly referred to as
"junk" bonds) and convertible securities. The broad category of corporate debt
securities includes debt issued by U.S. and non-U.S. companies of all kinds,
including those with small, mid and large capitalizations. Corporate debt may
carry fixed or floating rates of interest.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (2/11/13) Inception (2/11/13)
4/30/17 4/30/17 to 4/30/17 to 4/30/17
FUND PERFORMANCE
NAV 4.05% 10.67% 5.40% 24.79%
Market Price 3.94% 10.42% 5.42% 24.89%
INDEX PERFORMANCE
BofA Merrill Lynch Fixed Rate Preferred Securities Index 2.98% 6.50% 6.17% 28.68%
BofA Merrill Lynch U.S. Capital Securities Index 1.94% 7.55% 5.69% 26.28%
Blended Index(1) 2.46% 7.03% 5.95% 27.55%
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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 periods indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the periods
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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.
(1) The Blended Index consists of a 50/50 blend of the BofA Merrill Lynch
Fixed Rate Preferred Securities Index and the BofA Merrill Lynch U.S.
Capital Securities Index. The Blended Index reflects the diverse
allocation of institutional preferred and hybrid securities in the Fund's
portfolio. The indexes do not charge management fees or brokerage
expenses, and no such fees or expenses were deducted from the performance
shown. Indexes are unmanaged and an investor cannot invest directly in an
index.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
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% OF TOTAL
PORTFOLIO SECTOR ALLOCATION INVESTMENTS
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Financials 72.1%
Utilities 7.8
Energy 6.7
Telecommunication Services 3.9
Consumer Staples 3.4
Real Estate 2.9
Industrials 1.5
Materials 1.0
Information Technology 0.7
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Total 100.0%
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% OF TOTAL
CREDIT RATING(2) INVESTMENTS
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A 0.6%
A- 2.4
BBB+ 8.1
BBB 15.7
BBB- 21.5
BB+ 26.2
BB 8.3
BB- 5.8
B+ 3.8
B 0.1
B- 0.1
NR 7.4
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Total 100.0%
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NR - Not Rated
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% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
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Emera, Inc., Series 16-A 2.5%
GMAC Capital Trust I, Series 2 2.3
Enbridge Energy Partners L.P. 2.0
Morgan Stanley, Series F 2.0
Enel S.p.A. 1.9
Goldman Sachs Group, Inc., Series K 1.9
Royal Bank Of Scotland Group PLC 1.7
Catlin Insurance Co., Ltd. 1.6
Transcanda Trust, Series 16-A 1.3
VEREIT, Inc., Series F 1.3
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Total 18.5%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS
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United States 58.2%
France 7.4
United Kingdom 6.5
Canada 5.2
Australia 3.8
Bermuda 3.6
Netherlands 3.3
Italy 2.9
Cayman Islands 2.5
Switzerland 1.7
Spain 1.6
Ireland 1.2
Japan 1.1
Mexico 0.5
Belgium 0.2
Chile 0.1
Jersey 0.1
Brazil 0.1
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Total 100.0%
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(2) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 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
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
FEBRUARY 11, 2013 - APRIL 30, 2017
First Trust BofA Merrill Lynch BofA Merrill Lynch
Preferred Securities Fixed Rate Preferred U.S. Capital Blended
and Income ETF Securities Index Securities Index Index(1)
2/11/13 $10,000 $10,000 $10,000 $10,000
4/30/13 10,330 10,253 10,342 10,297
10/31/13 9,426 9,640 10,392 10,010
4/30/14 10,084 10,418 10,992 10,704
10/31/14 10,409 10,841 11,364 11,102
4/30/15 10,810 11,326 11,766 11,547
10/31/15 11,007 11,653 11,546 11,604
4/30/16 11,276 12,083 11,743 11,917
10/31/16 11,994 12,496 12,390 12,448
4/30/17 12,480 12,868 12,630 12,754
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 APRIL 30, 2017
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 12, 2013
(commencement of trading) through April 30, 2017. 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.
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NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
2/12/13 - 10/31/13 96 7 0 0
11/1/13 - 10/31/14 140 2 0 0
11/1/14 - 10/31/15 214 16 0 0
11/1/15 - 10/31/16 212 13 0 0
11/1/16 - 4/30/17 113 1 0 0
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
2/12/13 - 10/31/13 73 7 0 0
11/1/13 - 10/31/14 101 9 0 0
11/1/14 - 10/31/15 21 0 0 0
11/1/15 - 10/31/16 26 1 0 0
11/1/16 - 4/30/17 9 0 0 0
(1) The Blended Index consists of a 50/50 blend of the BofA Merrill Lynch
Fixed Rate Preferred Securities Index and the BofA Merrill Lynch U.S.
Capital Securities Index. The Blended Index reflects the diverse
allocation of institutional preferred and hybrid securities in the Fund's
portfolio. The indexes do not charge management fees or brokerage
expenses, and no such fees or expenses were deducted from the performance
shown. Indexes are unmanaged and an investor cannot invest directly in an
index.
Page 4
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PORTFOLIO MANAGEMENT
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
SEMI-ANNUAL REPORT
APRIL 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor which
offers customized portfolio management using its structured, quantitative
approach to security selection. As of April 30, 2017, First Trust managed or
supervised $105.533 billion in assets.
SUB-ADVISOR
STONEBRIDGE ADVISORS LLC
Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") is the investment
sub-advisor to First Trust Preferred Securities and Income ETF (the "Fund") and
is a registered investment advisor based in Wilton, Connecticut. Stonebridge
specializes in the management of preferred securities and North American equity
income securities.
STONEBRIDGE ADVISORS LLC PORTFOLIO MANAGEMENT TEAM
SCOTT T. FLEMING - PRESIDENT AND CHIEF INVESTMENT OFFICER
ROBERT WOLF - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
DANIELLE SALTERS, CFA - VICE PRESIDENT, PORTFOLIO MANAGER AND CREDIT ANALYST
Page 5
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2017 (UNAUDITED)
As a shareholder of First Trust Preferred Securities and 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 April 30, 2017.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2016 APRIL 30, 2017 PERIOD PERIOD (a)
-------------------------------------------------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF
Actual $1,000.00 $1,040.50 0.85% $4.30
Hypothetical (5% return before expenses) $1,000.00 $1,020.58 0.85% $4.26
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (November 1,
2016 through April 30, 2017), multiplied by 181/365 (to reflect the
one-half year period).
Page 6
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
$25 PAR PREFERRED SECURITIES - 37.0%
BANKS - 10.3%
207,660 Banc Of California, Inc., Series E.............................. 7.00% (a) $ 5,473,918
149,376 Bank of America Corp., Series CC................................ 6.20% (a) 3,883,776
684,155 Citigroup Capital XIII (b)...................................... 7.54% 10/30/40 17,952,227
60,787 Citigroup, Inc., Series S....................................... 6.30% (a) 1,625,444
569,261 Fifth Third Bancorp, Series I (c)............................... 6.63% (a) 16,269,479
194,313 FNB Corp. (c)................................................... 7.25% (a) 5,741,949
1,751,778 GMAC Capital Trust I, Series 2 (b).............................. 6.82% 02/15/40 44,600,268
551,455 Huntington Bancshares, Inc., Series D........................... 6.25% (a) 14,944,430
522,260 KeyCorp, Series E (c)........................................... 6.13% (a) 14,685,951
600,428 People's United Financial, Inc., Series A (c)................... 5.63% (a) 16,547,796
160,173 PNC Financial Services Group, Inc., Series P (c)................ 6.13% (a) 4,688,264
597,765 Royal Bank of Scotland Group PLC, Series S...................... 6.60% (a) 15,213,119
428,367 Synovus Financial Corp., Series C (c)........................... 7.88% (a) 11,844,348
162,689 Valley National Bancorp, Series A (c)........................... 6.25% (a) 4,639,890
65,256 Wells Fargo & Co., Series W..................................... 5.70% (a) 1,660,113
55,277 Western Allliance Bancorp....................................... 6.25% 07/01/56 1,398,508
452,999 Wintrust Financial Corp., Series D (c).......................... 6.50% (a) 12,208,323
240,555 Zions Bancorporation, Series F.................................. 7.90% (a) 6,126,936
192,329 Zions Bancorporation, Series G (c).............................. 6.30% (a) 5,504,456
--------------
205,009,195
--------------
CAPITAL MARKETS - 8.4%
648,444 Apollo Investment Corp.......................................... 6.63% 10/15/42 16,405,633
622,344 Apollo Investment Corp.......................................... 6.88% 07/15/43 16,187,167
202,404 BGC Partners, Inc............................................... 8.13% 06/15/42 5,177,494
1,303,751 Goldman Sachs Group, Inc., Series K (c)......................... 6.38% (a) 37,261,204
790,908 Morgan Stanley, Series E (c).................................... 7.13% (a) 23,213,150
1,310,295 Morgan Stanley, Series F (c).................................... 6.88% (a) 37,998,555
251,963 Morgan Stanley, Series I (c).................................... 6.38% (a) 6,997,013
182,000 Morgan Stanley, Series K (c).................................... 5.85% (a) 4,801,160
152,677 Solar Capital Ltd............................................... 6.75% 11/15/42 3,893,264
314,171 State Street Corp., Series G (c)................................ 5.35% (a) 8,394,649
202,903 Stifel Financial Corp., Series A................................ 6.25% (a) 5,356,639
--------------
165,685,928
--------------
CONSUMER FINANCE - 0.1%
66,764 Capital One Financial Corp., Series D........................... 6.70% (a) 1,836,010
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.9%
686,727 KKR Financial Holdings LLC, Series A............................ 7.38% (a) 17,751,893
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.5%
798,408 Qwest Corp...................................................... 6.88% 10/01/54 20,359,404
187,601 Qwest Corp...................................................... 6.50% 09/01/56 4,671,265
157,714 Qwest Corp...................................................... 6.75% 06/15/57 3,934,964
--------------
28,965,633
--------------
ELECTRIC UTILITIES - 0.3%
102,046 SCE Trust V, Series K (c)....................................... 5.45% (a) 2,894,025
151,507 Southern (The) Co............................................... 6.25% 10/15/75 4,013,420
--------------
6,907,445
--------------
EQUITY REAL ESTATE INVESTMENT TRUSTS - 2.5%
196,876 American Homes 4 Rent, Series D................................. 6.50% (a) 5,152,245
525,107 American Homes 4 Rent, Series E................................. 6.35% (a) 13,574,016
238,791 EPR Properties, Series F........................................ 6.63% (a) 6,172,747
973,598 VEREIT, Inc., Series F.......................................... 6.70% (a) 25,050,677
--------------
49,949,685
--------------
See Notes to Financial Statements Page 7
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
$25 PAR PREFERRED SECURITIES (CONTINUED)
FOOD PRODUCTS - 1.6%
485,426 CHS, Inc., Series 2 (c)......................................... 7.10% (a) $ 13,655,033
501,749 CHS, Inc., Series 3 (c)......................................... 6.75% (a) 13,617,468
152,339 CHS, Inc., Series 4............................................. 7.50% (a) 4,402,597
--------------
31,675,098
--------------
INSURANCE - 6.4%
22,366 Aegon N.V....................................................... 6.38% (a) 576,595
759,582 Aegon N.V....................................................... 8.00% 02/15/42 19,506,066
106,333 AmTrust Financial Services, Inc................................. 7.25% 06/15/55 2,668,958
214,095 AmTrust Financial Services, Inc................................. 7.50% 09/15/55 5,493,678
55,122 AmTrust Financial Services, Inc., Series F...................... 6.95% (a) 1,218,747
42,700 Aspen Insurance Holdings Ltd.................................... 5.63% (a) 1,041,880
467,252 Aspen Insurance Holdings Ltd. (c)............................... 5.95% (a) 12,896,155
63,088 Aspen Insurance Holdings Ltd.................................... 7.25% (a) 1,607,482
157,078 Berkley (WR) Corp............................................... 5.75% 06/01/56 3,964,649
445,203 Delphi Financial Group, Inc. (b) (d)............................ 7.38% 05/15/37 10,058,828
490,909 Global Indemnity Ltd............................................ 7.75% 08/15/45 12,370,907
327,314 Global Indemnity Ltd............................................ 7.88% 04/15/47 8,215,581
39,476 Maiden Holdings North America Ltd............................... 8.00% 03/27/42 1,005,493
305,466 National General Holdings Corp.................................. 7.63% 09/15/55 7,703,853
85,183 National General Holdings Corp., Series C....................... 7.50% (a) 2,161,093
477,392 PartnerRe Ltd., Series H........................................ 7.25% (a) 13,810,951
145,704 Phoenix Cos., Inc............................................... 7.45% 01/15/32 2,668,204
714,906 Reinsurance Group of America, Inc. (c).......................... 5.75% 06/15/56 19,910,132
1,065 Torchmark Corp.................................................. 6.13% 06/15/56 28,244
--------------
126,907,496
--------------
INTERNET SOFTWARE & SERVICES - 0.6%
475,869 eBay, Inc....................................................... 6.00% 02/01/56 12,615,287
--------------
MORTGAGE REAL ESTATE INVESTMENT TRUSTS - 0.4%
284,874 MFA Financial, Inc.............................................. 8.00% 04/15/42 7,326,959
--------------
MULTI-UTILITIES - 0.9%
315,187 Integrys Holding, Inc. (c)...................................... 6.00% 08/01/73 8,592,786
332,817 Just Energy Group, Inc., Series A (c)........................... 8.50% (a) 9,049,294
--------------
17,642,080
--------------
OIL, GAS & CONSUMABLE FUELS - 0.7%
205,006 NuStar Energy L.P., Series A (c)................................ 8.50% (a) 5,490,061
336,547 NuStar Logistics L.P. (c)....................................... 7.63% 01/15/43 8,625,699
--------------
14,115,760
--------------
THRIFTS & MORTGAGE FINANCE - 1.1%
779,362 New York Community Bancorp, Inc., Series A (c).................. 6.38% (a) 21,354,519
--------------
WIRELESS TELECOMMUNICATION SERVICES - 1.3%
150,543 United States Cellular Corp..................................... 7.25% 12/01/63 4,011,971
812,000 United States Cellular Corp..................................... 7.25% 12/01/64 21,777,840
--------------
25,789,811
--------------
TOTAL $25 PAR PREFERRED SECURITIES......................................................... 733,532,799
(Cost $718,163,466) --------------
$50 PAR PREFERRED SECURITIES - 0.3%
CONSUMER FINANCE - 0.3%
140,938 SLM Corp., Series A............................................. 6.97% (a) 7,053,947
(Cost $6,790,261) --------------
Page 8 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
$100 PAR PREFERRED SECURITIES - 1.3%
BANKS - 0.4%
1,600 Agribank FCB (c) (d)............................................ 6.88% (a) $ 177,900
13,500 CoBank ACB, Series F (c)........................................ 6.25% (a) 1,399,781
11,180 CoBank ACB, Series G............................................ 6.13% (a) 1,110,664
12,205 Cobank ACB, Series H (c)........................................ 6.20% (a) 1,261,311
33,340 Farm Credit Bank Of Texas (c) (d)............................... 6.75% (a) 3,623,641
--------------
7,573,297
--------------
CONSUMER FINANCE - 0.9%
257,964 SLM Corp., Series B (b)......................................... 2.83% (a) 17,587,986
--------------
TOTAL $100 PAR PREFERRED SECURITIES........................................................ 25,161,283
(Cost $19,307,031) --------------
$1,000 PAR PREFERRED SECURITIES - 3.3%
BANKS - 1.5%
2,500 AgStar Financial Services ACA (c) (e)........................... 6.75% (a) 2,677,187
18,000 Farm Credit Bank Of Texas, Series 1 (d)......................... 10.00% (a) 22,140,000
4,556 Sovereign Real Estate Investment Trust (e)...................... 12.00% (a) 5,683,610
--------------
30,500,797
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.3%
7,000 Kinder Morgan GP, Inc. (b) (e).................................. 4.95% 08/18/57 6,370,438
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.2%
2,862 Centaur Funding Corp. (e)....................................... 9.08% 04/21/20 3,336,913
--------------
INSURANCE - 1.3%
28,449 XLIT Ltd., Series D (b)......................................... 4.28% (a) 24,688,398
--------------
TOTAL $1,000 PAR PREFERRED SECURITIES...................................................... 64,896,546
(Cost $64,081,323) --------------
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
CAPITAL PREFERRED SECURITIES - 56.1%
BANKS - 25.6%
$ 7,500,000 Australia & New Zealand Banking Group Ltd. (c) (f) (g).......... 6.75% (a) 8,332,793
22,000,000 Banco Bilbao Vizcaya Argentaria S.A. (c) (f).................... 9.00% (a) 23,243,484
1,000,000 Banco do Brasil S.A. (c) (f) (g)................................ 9.00% (a) 1,059,000
10,600,000 Banco Mercantil del Norte S.A. (c) (f) (g)...................... 5.75% 10/04/31 10,435,700
7,400,000 Banco Santander S.A. (c) (f).................................... 6.38% (a) 7,563,185
17,000,000 Bank of America Corp., Series DD (c)............................ 6.30% (a) 18,763,750
20,000,000 Bank of America Corp., Series Z (c)............................. 6.50% (a) 22,250,000
566 Barclays PLC (c) (f)............................................ 6.63% (a) 578
15,000,000 Barclays PLC (c) (f)............................................ 7.88% (a) 16,128,600
17,000,000 Barclays PLC (c) (f)............................................ 8.25% (a) 18,128,205
20,000,000 BNP Paribas S.A. (c) (f) (g).................................... 7.63% (a) 21,776,000
2,029,000 BPCE S.A. (c)................................................... 12.50% (a) 2,450,018
5,498,000 BPCE S.A. (c) (g)............................................... 12.50% (a) 6,638,835
9,135,000 Citigroup, Inc., Series O (c)................................... 5.88% (a) 9,536,483
4,000,000 Citigroup, Inc., Series Q (c)................................... 5.95% (a) 4,213,900
10,000,000 Citigroup, Inc., Series R (c)................................... 6.13% (a) 10,668,000
4,000,000 Citigroup, Inc., Series T (c)................................... 6.25% (a) 4,360,000
2,616,000 Citizens Financial Group, Inc. (c).............................. 5.50% (a) 2,710,830
13,200,000 CoBank ACB, Series I (c)........................................ 6.25% (a) 14,454,766
6,621,000 Cooperatieve Rabobank UA (c) (g)................................ 11.00% (a) 7,754,846
6,850,000 Cooperatieve Rabobank UA (c).................................... 11.00% (a) 8,023,063
See Notes to Financial Statements Page 9
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
BANKS (CONTINUED)
$ 17,500,000 Credit Agricole S.A. (c) (f) (g)................................ 8.13% (a) $ 19,358,237
6,000,000 Credit Agricole S.A. (c)........................................ 8.38% (a) 6,716,280
13,251,000 Credit Agricole S.A. (c) (g).................................... 8.38% (a) 14,832,904
5,000,000 Dresdner Funding Trust I........................................ 8.15% 06/30/31 5,955,950
2,000,000 HBOS Capital Funding L.P........................................ 6.85% (a) 2,041,232
7,000,000 ING Groep N.V. (c) (f).......................................... 6.88% (a) 7,446,880
20,025,000 Intesa Sanpaolo S.p.A. (c) (f) (g).............................. 7.70% (a) 19,849,781
20,145,000 JPMorgan Chase & Co., Series 1 (c).............................. 7.90% (a) 21,076,706
7,663,000 JPMorgan Chase & Co., Series S (c).............................. 6.75% (a) 8,653,443
8,088,000 Lloyds Bank PLC (c)............................................. 12.00% (a) 11,025,966
3,000,000 Lloyds Banking Group PLC (c) (f)................................ 7.50% (a) 3,240,000
19,096,000 Macquarie Bank Ltd. (c) (f)..................................... 10.25% 06/20/57 19,450,765
1,000,000 Natixis S.A. (c)................................................ 10.00% (a) 1,072,500
3,000,000 Natixis S.A. (c) (g)............................................ 10.00% (a) 3,217,500
3,785,000 NIBC Bank N.V................................................... 7.63% (a) 3,942,729
9,500,000 PNC Financial Services Group, Inc. (c).......................... 6.75% (a) 10,735,000
1,000,000 Royal Bank Of Scotland Group PLC (c)............................ 7.65% (a) 1,190,000
3,000,000 Royal Bank Of Scotland Group PLC (c) (f)........................ 8.00% (a) 3,120,000
30,000,000 Royal Bank Of Scotland Group PLC (c) (f)........................ 8.63% (a) 32,460,000
22,200,000 Societe Generale S.A. (c) (f) (g)............................... 7.38% (a) 23,532,000
13,000,000 Societe Generale S.A. (c) (f)................................... 8.25% (a) 13,820,326
11,000,000 Standard Chartered PLC (c) (f) (g).............................. 7.50% (a) 11,761,750
10,000,000 Sun Trust Banks, Inc. (c)....................................... 5.05% (a) 10,070,200
20,691,000 Wells Fargo & Co., Series K (c)................................. 7.98% (a) 21,673,822
6,000,000 Wells Fargo & Co., Series U (c)................................. 5.88% (a) 6,517,500
6,000,000 Zions Bancorporation, Series J (c).............................. 7.20% (a) 6,495,000
--------------
507,748,507
--------------
CAPITAL MARKETS - 2.5%
6,879,000 Aberdeen Asset Management PLC................................... 7.00% (a) 7,150,521
20,500,000 Credit Suisse Group AG (c) (f) (g).............................. 7.50% (a) 22,783,598
2,000,000 E*Trade Financial Corp., Series A (c)........................... 5.88% (a) 2,085,000
7,500,000 Goldman Sachs Group, Inc., Series L (c)......................... 5.70% (a) 7,753,125
3,000,000 UBS Group AG (c) (f)............................................ 6.88% (a) 3,194,892
7,000,000 UBS Group AG (c) (f)............................................ 7.13% (a) 7,444,451
--------------
50,411,587
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
4,000,000 Glen Meadow Pass-Through Trust (b) (g).......................... 3.16% 02/12/47 3,515,000
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.9%
11,882,000 Koninklijke KPN N.V. (c) (g).................................... 7.00% 03/28/73 12,989,996
3,900,000 Koninklijke KPN N.V. (c)........................................ 7.00% 03/28/73 4,263,675
--------------
17,253,671
--------------
ELECTRIC UTILITIES - 6.4%
44,000,000 Emera, Inc., Series 16-A (c).................................... 6.75% 06/15/76 48,675,000
31,975,000 Enel S.p.A. (c) (g)............................................. 8.75% 09/24/73 37,490,687
6,900,000 Nextera Energy Capital Holdings, Inc., Series D (c)............. 7.30% 09/01/67 6,951,336
23,893,000 PPL Capital Funding, Inc., Series A (b)......................... 3.82% 03/30/67 23,116,478
9,700,000 Southern (The) Co., Series B (c)................................ 5.50% 03/15/57 10,060,627
1,359,000 Southern California Edison Co., Series E (c).................... 6.25% (a) 1,513,586
--------------
127,807,714
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
ENERGY EQUIPMENT & SERVICES - 2.1%
$ 17,100,000 Transcanada Trust (c)........................................... 5.30% 03/15/77 $ 17,281,688
23,397,000 Transcanada Trust, Series 16-A (c).............................. 5.88% 08/15/76 25,210,267
--------------
42,491,955
--------------
FOOD PRODUCTS - 2.6%
6,200,000 Dairy Farmers of America, Inc. (e).............................. 7.13% (a) 6,843,250
3,000,000 Land O'Lakes Capital Trust I (e)................................ 7.45% 03/15/28 3,360,000
8,800,000 Land O'Lakes, Inc. (g).......................................... 7.25% (a) 8,932,000
15,000,000 Land O'Lakes, Inc. (g).......................................... 8.00% (a) 16,125,000
16,000,000 Land O'Lakes, Inc. (g).......................................... 8.00% (a) 17,200,000
--------------
52,460,250
--------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.2%
1,500,000 AES Gener S.A. (c) (g).......................................... 8.38% 12/18/73 1,616,250
1,250,000 AES Gener S.A. (c).............................................. 8.38% 12/18/73 1,346,875
--------------
2,963,125
--------------
INDUSTRIAL CONGLOMERATES - 0.5%
10,000,000 General Electric Co., Series D (c).............................. 5.00% (a) 10,560,000
--------------
INSURANCE - 9.6%
2,800,000 AG Insurance S.A. (c)........................................... 6.75% (a) 2,980,964
20,470,000 Aquarius & Investments PLC for Swiss Reinsurance Co., Ltd. (c).. 8.25% (a) 21,988,280
10,054,000 Assured Guaranty Municipal Holdings, Inc. (c) (g)............... 6.40% 12/15/66 9,073,735
1,000,000 Aviva PLC....................................................... 8.25% (a) 1,036,250
1,100,000 Catlin Insurance Co., Ltd. (b).................................. 4.13% (a) 1,014,750
33,352,000 Catlin Insurance Co., Ltd. (b) (g).............................. 4.13% (a) 30,767,220
500,000 Cloverie PLC for Zurich Insurance Co., Ltd. (c)................. 8.25% (a) 526,250
4,200,000 CNP Assurances (c).............................................. 6.88% (a) 4,524,626
1,100,000 CNP Assurances (c).............................................. 7.50% (a) 1,176,566
5,000,000 Dai-ichi Life Insurance Co., Ltd. (c) (g)....................... 4.00% (a) 4,902,000
505,000 Everest Reinsurance Holdings, Inc. (b).......................... 6.60% 05/15/37 467,125
6,201,000 Friends Life Holdings PLC (c)................................... 7.88% (a) 6,662,863
1,000,000 Hartford Financial Services Group, Inc. (c)..................... 8.13% 06/15/38 1,059,690
22,202,000 La Mondiale SAM (c)............................................. 7.63% (a) 24,061,040
5,260,000 Liberty Mutual Group, Inc. (b) (g).............................. 4.04% 03/15/37 5,041,710
6,128,000 Liberty Mutual Group, Inc. (c) (g).............................. 7.80% 03/15/37 7,108,480
465,000 Liberty Mutual Group, Inc. (c) (g).............................. 10.75% 06/15/58 719,588
9,000,000 MetLife, Inc. (g)............................................... 9.25% 04/08/38 12,971,250
13,565,000 Mitsui Sumitomo Insurance Co., Ltd. (c) (g)..................... 7.00% 03/15/72 15,684,531
1,100,000 Nationwide Financial Services, Inc.............................. 6.75% 05/15/37 1,166,000
14,000,000 QBE Insurance Group, Ltd. (c) (g)............................... 7.50% 11/24/43 16,012,500
10,506,000 QBE Insurance Group, Ltd. (c)................................... 6.75% 12/02/44 11,592,951
8,600,000 Sirius International Group Ltd. (c) (e)......................... 7.51% (a) 8,793,500
--------------
189,331,869
--------------
METALS & MINING - 1.0%
9,500,000 BHP Billiton Finance USA Ltd. (c) (g)........................... 6.25% 10/19/75 10,345,500
7,500,000 BHP Billiton Finance USA Ltd. (c) (g)........................... 6.75% 10/19/75 8,512,500
--------------
18,858,000
--------------
OIL, GAS & CONSUMABLE FUELS - 3.7%
40,044,441 Enbridge Energy Partners L.P. (c)............................... 8.05% 10/01/37 39,744,107
22,204,594 Enterprise Products Operating LLC, Series A (b)................. 4.88% 08/01/66 22,232,350
10,500,000 Enterprise Products Operating LLC, Series B (c)................. 7.03% 01/15/68 10,893,750
--------------
72,870,207
--------------
See Notes to Financial Statements Page 11
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ---------------------------------------------------------------- ------------- ---------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
TRANSPORTATION INFRASTRUCTURE - 0.8%
$ 15,000,000 AerCap Global Aviation Trust (c) (g)............................ 6.50% 06/15/45 $ 15,825,000
--------------
TOTAL CAPITAL PREFERRED SECURITIES......................................................... 1,112,096,885
(Cost $1,076,867,436) --------------
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
CLOSED-END FUNDS - 0.1%
CAPITAL MARKETS - 0.1%
40,540 Flaherty & Crumrine Dynamic Preferred and Income Fund, Inc................................. 1,028,500
(Cost $914,559) --------------
TOTAL INVESTMENTS - 98.1%.................................................................. 1,943,769,960
(Cost $1,886,124,076) (h)
NET OTHER ASSETS AND LIABILITIES - 1.9%.................................................... 38,518,507
--------------
NET ASSETS - 100.0%........................................................................ $1,982,288,467
==============
-----------------------------
(a) Perpetual maturity.
(b) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2017.
(c) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at April 30, 2017. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(d) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by Stonebridge Advisors LLC,
the Fund's sub-advisor (the "Sub-Advisor").
(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 (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers (see Note 2C - Restricted Securities in the Notes to Financial
Statements).
(f) This security is a contingent convertible capital security which may be
subject to conversion into common stock of the issuer under certain
circumstances. At April 30, 2017, securities noted as such amounted to
$294,130,225 or 14.8% of net assets. Of these securities, 3.9% originated
in emerging markets, and 96.1% originated in foreign markets.
(g) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 1933 Act,
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 the Sub-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 April 30, 2017, securities noted as such
amounted to $406,165,891 or 20.5% of net assets.
(h) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $65,106,886 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $7,461,002.
Page 12 See Notes to Financial Statements
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUTS INPUTS
-------------- ------------- -------------- -------------
$25 Par Preferred Securities:
Insurance....................................... $ 126,907,496 $ 114,180,464 $ 12,727,032 $ --
Multi-Utilities................................. 17,642,080 9,049,294 8,592,786 --
Other Industry Categories*...................... 588,983,223 588,983,223 -- --
$50 Par Preferred Securities*...................... 7,053,947 7,053,947 -- --
$100 Par Preferred Securities:
Banks........................................... 7,573,297 -- 7,573,297 --
Consumer Finance................................ 17,587,986 17,587,986 -- --
$1,000 Par Preferred Securities*................... 64,896,546 -- 64,896,546 --
Capital Preferred Securities*...................... 1,112,096,885 -- 1,112,096,885 --
Closed-End Funds*.................................. 1,028,500 1,028,500 -- --
-------------- ------------- -------------- -------------
Total Investments.................................. $1,943,769,960 $ 737,883,414 $1,205,886,546 $ --
============== ============= ============== =============
* See the 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 April 30, 2017.
See Notes to Financial Statements Page 13
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value..................................................... $ 1,943,769,960
Cash...................................................................... 42,535,781
Receivables:
Interest............................................................... 15,196,743
Capital shares sold.................................................... 7,873,336
Investment securities sold............................................. 2,511,601
Dividends.............................................................. 2,064,542
Tax reclaims........................................................... 244,183
---------------
Total Assets........................................................... 2,014,196,146
---------------
LIABILITIES:
Payables:
Investment securities purchased........................................ 30,577,534
Investment advisory fees............................................... 1,330,145
---------------
Total Liabilities...................................................... 31,907,679
---------------
NET ASSETS................................................................ $ 1,982,288,467
===============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 1,933,897,452
Par value................................................................. 1,006,550
Accumulated net investment income (loss).................................. (32,078)
Accumulated net realized gain (loss) on investments....................... (10,229,341)
Net unrealized appreciation (depreciation) on investments................. 57,645,884
---------------
NET ASSETS................................................................ $ 1,982,288,467
===============
NET ASSET VALUE, per share................................................ $ 19.69
===============
Number of shares outstanding (unlimited number of
shares authorized, par value $0.01 per share).......................... 100,655,000
===============
Investments, at cost...................................................... $ 1,886,124,076
===============
Page 14 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Interest.................................................................. $ 29,470,220
Dividends................................................................. 23,770,040
Foreign tax withholding................................................... (17,955)
---------------
Total investment income................................................ 53,222,305
---------------
EXPENSES:
Investment advisory fees.................................................. 6,855,254
---------------
Total expenses......................................................... 6,855,254
---------------
NET INVESTMENT INCOME (LOSS).............................................. 46,367,051
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................ (2,583,115)
In-kind redemptions.................................................... 138,259
---------------
Net realized gain (loss).................................................. (2,444,856)
---------------
Net change in unrealized appreciation (depreciation) ..................... 30,158,632
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 27,713,776
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 74,080,827
===============
See Notes to Financial Statements Page 15
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2017 ENDED
(UNAUDITED) 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)......................................................... $ 46,367,051 $ 50,295,555
Net realized gain (loss)............................................................. (2,444,856) (1,268,137)
Net change in unrealized appreciation (depreciation)................................. 30,158,632 28,313,723
-------------- --------------
Net increase (decrease) in net assets resulting from operations...................... 74,080,827 77,341,141
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................ (46,882,327) (50,469,633)
Return of capital.................................................................... -- (440,159)
-------------- --------------
Total distributions to shareholders.................................................. (46,882,327) (50,909,792)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold............................................................ 591,046,207 955,735,609
Cost of shares redeemed.............................................................. (11,354,298) (20,474,196)
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder transactions........ 579,691,909 935,261,413
-------------- --------------
Total increase (decrease) in net assets.............................................. 606,890,409 961,692,762
NET ASSETS:
Beginning of period.................................................................. 1,375,398,058 413,705,296
-------------- --------------
End of period........................................................................ $ 1,982,288,467 $1,375,398,058
============== ==============
Accumulated net investment income (loss) at end of period............................ $ (32,078) $ 483,198
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period.............................................. 70,655,000 21,805,000
Shares sold.......................................................................... 30,600,000 49,950,000
Shares redeemed...................................................................... (600,000) (1,100,000)
-------------- --------------
Shares outstanding, end of period.................................................... 100,655,000 70,655,000
============== ==============
Page 16 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED OCTOBER 31, 2/11/2013 (a)
4/30/2017 -------------------------------------------------- THROUGH
(UNAUDITED) 2016 2015 2014 10/31/2013
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period $ 19.47 $ 18.97 $ 19.04 $ 18.21 $ 19.99
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.54 1.12 1.16 (b) 1.10 0.65
Net realized and unrealized gain (loss) 0.23 0.52 (0.10) 0.76 (1.78)
---------- ---------- ---------- ---------- ----------
Total from investment operations 0.77 1.64 1.06 1.86 (1.13)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.55) (1.13) (1.13) (1.03) (0.62)
Return of capital -- (0.01) -- -- (0.03)
---------- ---------- ---------- ---------- ----------
Total distributions (0.55) (1.14) (1.13) (1.03) (0.65)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 19.69 $ 19.47 $ 18.97 $ 19.04 $ 18.21
========== ========== ========== ========== ==========
TOTAL RETURN (c) 4.05% 8.97% 5.75% 10.42% (5.74)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,982,288 $1,375,398 $ 413,705 $ 86,718 $ 64,722
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets 0.85% (d) 0.85% 0.85% 0.85% 0.85% (d)
Ratio of net investment income (loss) to
average net assets 5.75% (d) 5.97% 6.15% 6.06% 5.44% (d)
Portfolio turnover rate (e) 6% 32% 50% 91% 45%
(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 Preferred Securities and Income ETF
on January 29, 2013 in order to provide initial capital required by SEC
rules.
(b) Based on average shares outstanding.
(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.
See Notes to Financial Statements Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
January 9, 2008, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of ten funds that are offering shares. This report
covers the First Trust Preferred Securities and Income ETF (the "Fund"), which
trades under the ticker FPE on the NYSE Arca, Inc. 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 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 shares are not redeemable
securities of the Fund.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek total return and to provide current income. Under normal
market conditions, the Fund invests at least 80% of its net assets (including
investment borrowings) in preferred securities and income-producing debt
securities, including corporate bonds, high-yield securities (commonly referred
to as "junk" bonds) and convertible securities. There can be no assurance that
the Fund will achieve its investment objective. The Fund may not be appropriate
for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 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 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 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:
Preferred stocks, real estate investment trust ("REITs") 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.
Bonds, notes, capital preferred securities, and other debt securities are
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.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
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 (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 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.
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.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
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 April 30, 2017, 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. Amortization of premiums and accretion of
discounts are recorded using the effective interest method.
Distributions received from the Fund's investments in REITs may be comprised of
return of capital, capital gains and income. The actual character of the amounts
received during the year are not known until after the REIT's 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. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2017, the Fund held restricted securities
as shown in the following table that Stonebridge Advisors LLC ("Stonebridge" or
the "Sub-Advisor") has deemed illiquid pursuant to procedures adopted by the
Trust's Board of Trustees. 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. The Fund does not have the right to demand that such securities be
registered. These securities are valued according to the valuation procedures as
stated in the Portfolio Valuation note (Note 2A) and are not expressed as a
discount to the carrying value of a comparable unrestricted security. There are
no unrestricted securities with the same maturity dates and yields for these
issuers.
SHARES/ % OF
ACQUISITION PAR CURRENT CARRYING NET
SECURITY DATE AMOUNT PRICE COST VALUE ASSETS
------------------------------------------------------------------------------------------------------------------------------
AgStar Financial Services ACA, 6.75% 7/31/15 2,500 $ 1,070.88 $ 2,631,250 $ 2,677,187 0.13%
Centaur Funding Corp., 9.08%,
4/21/20 9/27/16 - 12/15/16 2,862 1,165.94 3,308,960 3,336,913 0.17
Dairy Farmers of America, Inc.,
7.13% 9/15/16 - 10/4/16 $ 6,200,000 1.10 6,233,750 6,843,250 0.35
Kinder Morgan GP, Inc., 4.95%,
8/18/57 3/21/17 - 4/4/17 7,000 910.06 6,387,500 6,370,438 0.32
Land O' Lakes Capital Trust I,
7.45%, 3/15/28 3/15/17 $ 3,000,000 1.12 3,200,838 3,360,000 0.17
Sirius International Group Ltd.,
7.51% 8/6/14 - 6/1/16 $ 8,600,000 1.02 8,913,250 8,793,500 0.44
Sovereign Real Estate Investment
Trust, 12.00% 5/12/14 - 3/22/16 4,556 1,247.50 5,906,010 5,683,610 0.29
------------- ------------- ---------
$ 36,581,558 $ 37,064,898 1.87%
============= ============= =========
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
Distributions from income and 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 net asset value
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 year ended October 31,
2016 was as follows:
Distributions paid from:
Ordinary income.................................... $ 50,469,633
Capital gain....................................... --
Return of capital.................................. 440,159
As of October 31, 2016, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income...................... $ --
Accumulated capital and other losses............... (7,166,493)
Net unrealized appreciation (depreciation)......... 27,352,458
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 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 April 30,
2017, 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.
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 for federal income tax purposes
of $7,166,493.
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.
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.
H. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
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.
Stonebridge, an affiliate of First Trust, serves as the Fund's sub-advisor and
manages the Fund's portfolio subject to First Trust's supervision. Pursuant to
the Investment Management Agreement between the Trust and the Advisor, First
Trust will supervise Stonebridge and its management of the investment of the
Fund's assets and will pay Stonebridge for its services as the Fund's
sub-advisor. First Trust and Stonebridge are equally 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.
Stonebridge receives a sub-advisory fee equal to 0.425% of the average daily net
assets of the Fund less Stonebridge's share of the Fund's expenses. The
Sub-Advisor's fee is paid by the Advisor out of the Advisor's management fee.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250, which is covered under the annual unitary
management fee.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
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 six months ended April 30, 2017, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
for the Fund were $565,188,066 and $97,469,187, respectively.
For the six months ended April 30, 2017, the cost of in-kind purchases and
proceeds from in-kind sales for the Fund was $99,420,364 and $3,644,548,
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 securities and
other instruments 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 aggregations) 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 BBH, 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 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 Creation Transaction Fee
may increase or decrease as the Fund's portfolio is adjusted to conform to
changes in 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
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
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 BBH, 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.
6. LINE OF CREDIT
The Trust, on behalf of the Fund, along with First Trust Series Fund and First
Trust Exchange-Traded Fund IV entered into a $220 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 and an agency fee. Prior to March 9, 2017, the commitment was $180
million. Prior to December 16, 2016, the commitment amount was $140 million.
First Trust allocates the commitment fee and agency 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 six months ended April 30, 2017.
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
Funds, for amounts expended to finance activities primarily intended to result
in the sale of Creation Units or to provide investor services. FTP may also use
this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before February 28, 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 to the Fund through
the date the financial statements were issued and has determined that there was
the following subsequent event:
On May 22, 2017, the Fund declared a distribution of $0.0905 per share to Common
Shareholders of record on May 25, 2017, payable May 31, 2017.
Page 23
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 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 located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of 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.
RISK CONSIDERATIONS
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.
CASH TRANSACTIONS RISK. The Fund may under certain circumstances effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an ETF that effects its creations and 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.
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.
CONTINGENT CONVERTIBLE SECURITIES RISK. Contingent convertible securities
("CoCos") may provide for mandatory conversion into common stock of the issuer
under certain circumstances. Since the common stock of the issuer may not pay a
dividend, investors in these instruments could experience a reduced income rate,
potentially to zero; and conversion would deepen the subordination of the
investor, hence worsening standing in a bankruptcy. In addition, some such
instruments have a set stock conversion rate that would cause a reduction in
value of the security if the price of the stock is below the conversion price on
the conversion date. CoCos may be considered to be high-yield securities (a.k.a.
"junk" bonds) and, to the extent a CoCo held by the Fund undergoes a write down,
the Fund may lose some or all of its original investment in the CoCo.
Performance of a CoCo issuer may, in general, be correlated with the performance
of other CoCo issuers. As a result, negative information regarding one CoCo
issuer may cause a decline in value of other CoCo issuers. Subordinate
securities such as CoCos are more likely to experience credit loss than
non-subordinate securities of the same issuer - even if the CoCos do not convert
to equity securities. Any losses incurred by subordinate securities, such as
CoCos, are likely to be proportionately greater than non-subordinate securities
and any recovery of principal and interest of subordinate securities may take
more time. As a result, any perceived decline in creditworthiness of a CoCo
issuer is likely to have a greater impact on the CoCo, as a subordinate
security.
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
if the Fund invests 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.
CURRENCY EXCHANGE RATE 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
Page 24
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2017 (UNAUDITED)
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.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying securities 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 securities into depositary receipts and vice versa. Such restrictions may
cause the securities of the underlying issuer to trade at a discount or premium
to the market price of the depositary receipts.
FINANCIAL COMPANY RISK. 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.
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. If interest rates rise, the prices of the fixed-rate
instruments held by the Fund may fall.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
sub-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 objective.
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 securities values could decline generally or could
underperform other investments.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which 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. The Fund may invest in securities of non-U.S. issuers.
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,
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.
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.
REIT RISK. Investing in REITs involves risks related to their structure and
focus, which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
Page 25
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First Trust
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Stonebridge Advisors LLC
10 Westport Road, Suite C101
Wilton, CT 06897
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 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 III
--------------------------------------------------------------------------------
First Trust Managed Municipal ETF (FMB)
Semi-Annual Report
For the
Six Months Ended
April 30, 2017
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
SEMI-ANNUAL REPORT
APRIL 30, 2017
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 16
Statement of Operations...................................................... 17
Statements of Changes in Net Assets.......................................... 18
Financial Highlights......................................................... 19
Notes to Financial Statements................................................ 20
Additional Information....................................................... 26
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 III (the "Trust") described in
this report (First Trust Managed Municipal 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 by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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.
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 its prospectus, statement of additional information,
this report, and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2017
Dear Shareholders:
Thank you for your investment in First Trust Managed Municipal ETF (the "Fund").
The year 2016 was a historic year all over the world. Many will remember some of
the events that occurred during the year: from the Brexit vote in the UK to
leave the European Union, to the results of the U.S. Presidential Election which
seemed unlikely at the beginning of 2016, to the first World Series Championship
for the Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment.
Additionally, First Trust has compiled the Fund's financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
On November 8, 2016, Donald J. Trump was elected to become the 45th president in
our country's history. As I write this, he has just hit his 100th day in office,
always a historic marker for pundits, politicians, and voters. While no one has
a crystal ball and the ability to predict how the Trump administration will
shape the United States (and the world), there is no doubt that his populist
message resonated for many Americans. His message of improving lives for the
"average" American, while reducing the size and scope of the federal government,
also won him millions of votes. Many of his supporters believe that with his
background in business, Trump will make policy changes that will continue to
grow the economy and spur stock markets even higher. Many analysts predicted the
Dow Jones Industrial Average would hit a new benchmark, 20,000, in the first
days of the New Year. It took until January 25, 2017, but the Dow finally traded
over 20,000 on that day. On March 1, 2017, the Dow went past 21,000, a new
record. As with all change and a new administration, only time will tell where
our economy and the markets will go.
As of December 31, 2016, the S&P 500(R) Index (the "Index") was up 11.96% for
the year, on a total return basis, as measured by Bloomberg. As of April 30,
2017, the Index was up 7.16% (calendar year-to-date). The current bull market
(measuring from March 9, 2009 through April 28, 2017) is the second longest in
history, but lags the longest bull market by 4.17 years, according to Bespoke
Investment Group. We remain bullish on the economy, but continue to have a
long-term perspective. We believe investors should think long-term as well,
since no one can predict volatility and the inevitable ups and downs that occur
in the market.
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 our relentless focus
on bringing the types of investments that we believe could help 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 MANAGED MUNICIPAL ETF (FMB)
The primary investment objective of First Trust Managed Municipal ETF (the
"Fund") is to generate current income that is exempt from regular federal income
taxes and its secondary objective is long-term capital appreciation. The Fund
lists and principally trades its shares on The Nasdaq Stock Market, LLC under
the ticker symbol "FMB." Under normal market conditions, the Fund seeks to
achieve its investment objectives by investing at least 80% of its net assets
(including investment borrowings) in municipal debt securities that pay interest
that is exempt from regular federal income taxes.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (5/13/14) Inception (5/13/14)
4/30/17 4/30/17 to 4/30/17 to 4/30/17
FUND PERFORMANCE
NAV -0.90% 0.91% 4.28% 13.24%
Market Price -0.85% 0.79% 4.31% 13.34%
INDEX PERFORMANCE
Bloomberg Barclays Municipal 10 Year Revenue Index -0.37% 0.03% 3.49% 10.69%
----------------------------------------------------------------------------------------------------------------------------------
Total returns for the periods since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the periods indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the periods
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 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 MANAGED MUNICIPAL ETF (FMB)
-----------------------------------------------------------
% OF TOTAL
INVESTMENTS
SECTOR ALLOCATION (INCLUDING CASH)
-----------------------------------------------------------
Hospital 13.9%
Continuing Care Retirement Communities 12.8
Cash 8.5
Insured 6.4
Dedicated Tax 6.3
Special Assessment 6.1
Government Obligation Bond - Unlimited Tax 5.9
Education 4.9
Higher Education 4.5
Government Obligation Bond - Limited Tax 3.7
Toll Road 3.6
Utility 3.2
Certificates of Participation 3.0
Gas 2.7
Industrial Development Bond 2.5
Water & Sewer 2.2
Tax Increment 2.0
Student Housing 1.9
Airport 1.6
Skilled Nursing 1.2
Mass Transit 1.0
Tobacco 0.9
Pre-refunded/Escrowed-to-maturity 0.8
Port 0.2
Stadium 0.1
Hotel 0.1
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
INVESTMENTS
CREDIT RATING(1) (INCLUDING CASH)
-----------------------------------------------------------
AAA 3.8%
AA 19.4
A 26.0
BBB 21.4
BB 6.3
NR 14.6
Cash 8.5
-------
Total 100.0%
=======
(1) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and ratings are not equivalent, the highest
ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or
lower. Investment grade ratings are those rated BBB-/Baa3 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
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
MAY 13, 2014 - APRIL 30, 2017
First Trust Managed Bloomberg Barclays Municipal
Municipal ETF 10 Year Revenue Index
5/13/14 $10,000 $10,000
10/31/14 10,353 10,298
4/30/15 10,586 10,437
10/31/15 10,733 10,634
4/30/16 11,222 11,066
10/31/16 11,429 11,110
4/30/17 11,324 11,069
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 APRIL 30, 2017
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 14, 2014 (commencement of
trading) through April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
5/14/14 - 10/31/14 2 10 0 0
11/1/14 - 10/31/15 178 16 0 0
11/1/15 - 10/31/16 200 0 0 0
11/1/16 - 4/30/17 83 0 0 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
5/14/14 - 10/31/14 64 43 0 0
11/1/14 - 10/31/15 57 0 0 0
11/1/15 - 10/31/16 51 1 0 0
11/1/16 - 4/30/17 40 0 0 0
Page 4
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PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
SEMI-ANNUAL REPORT
APRIL 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor that offers
customized portfolio management using its structured, quantitative approach to
security selection. As of April 30, 2017, First Trust managed or supervised
$105.533 billion in assets.
The First Trust Municipal Securities Team was formed in September of 2013 and is
headed by Tom Futrell, CFA and Johnathan Wilhelm who serve as senior portfolio
managers of the First Trust Managed Municipal ETF (the "Fund"). Messrs. Futrell
and Wilhelm have a combined 50+ years of investment experience and prior to
joining First Trust, served as portfolio managers of municipal bonds at Nuveen
Investments and Performance Trust Investment Advisors. In addition to the Fund,
the team manages/consults for a variety of investment portfolios and separately
managed accounts.
PORTFOLIO MANAGEMENT TEAM
TOM FUTRELL, CFA, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
JOHNATHAN N. WILHELM, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
Page 5
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2017 (UNAUDITED)
As a shareholder of First Trust Managed Municipal 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 April 30, 2017.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2016 APRIL 30, 2017 PERIOD (a) PERIOD (b)
-------------------------------------------------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
Actual $1,000.00 $ 991.00 0.50% $2.47
Hypothetical (5% return before expenses) $1,000.00 $1,022.32 0.50% $2.51
(a) These expense ratios reflect an expense waiver. 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 (November
1, 2016 through April 30, 2017), multiplied by 181/365 (to reflect the
one-half year period).
Page 6
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS - 93.3%
ALABAMA - 0.9%
$ 500,000 AL St Port Auth Docks Facs Rev Ref Docks Facs Rev, Ser A,
AGM, AMT..................................................... 5.00% 10/01/25 $ 579,480
600,000 Mobile AL Impt Dist Sales Tax Rev Mcgowin Park Proj, Ser A...... 5.00% 08/01/25 619,086
--------------
1,198,566
--------------
ARIZONA - 2.0%
250,000 AZ St Indl Dev Auth Edu Rev Ref Basis Schs Projs, Ser A (a)..... 4.00% 07/01/21 254,500
300,000 AZ St Indl Dev Auth Edu Rev Ref Basis Schs Projs, Ser A (a)..... 5.00% 07/01/26 319,725
500,000 Maricopa Cnty AZ Indl Dev Auth Edu Rev Ref Horizon Cmnty
Learning Ctr Proj............................................ 5.00% 07/01/35 527,405
500,000 Maricopa Cnty AZ Indl Dev Auth Edu Rev Ref Paradise Schs
Projs Paragon Mgmt Inc (a)................................... 4.00% 07/01/26 504,955
500,000 Phoenix AZ Indl Dev Auth Edu Rev Fac Legacy Traditional Schs
Projs, Ser A (a)............................................. 4.00% 07/01/26 490,575
500,000 Pima Cnty AZ Indl Dev Auth Edu Rev Ref Fac American
Leadership Academy Proj (a).................................. 4.60% 06/15/25 506,740
--------------
2,603,900
--------------
CALIFORNIA - 8.5%
320,000 Abag CA Fin Auth For Nonprofit Corps Ref Episcopal Sr Cmntys,
Ser B........................................................ 5.00% 07/01/23 354,250
275,000 CA Pub Fin Auth Rev Ref Henry Mayo Newhall Hosp................. 5.00% 10/15/29 307,472
1,000,000 CA St Muni Fin Auth Chrt Sch Rev Palmdale Aerospace Academy
Proj (a)..................................................... 4.00% 07/01/26 999,200
1,000,000 CA St Ref....................................................... 5.00% 08/01/28 1,201,510
500,000 CA St Ref, Ser C................................................ 5.00% 09/01/32 581,590
500,000 CA Stwd Cmntys Dev Auth Rev Ref Lancer Eductnl Student Hsg
Proj, Ser A (b).............................................. 4.00% 06/01/21 518,825
500,000 Foothill-De Anza CA Cmnty Clg Dist Ref, COPS.................... 5.00% 04/01/32 580,405
35,000 Golden St Tobacco Securitization Corp CA Tobacco Settlement
Asset-Backed Sr, Ser A-1..................................... 4.50% 06/01/27 35,081
1,360,000 Hawthorne CA Cmnty Redev Agy Successor Agy Tax Allocation
Ref Sub, AGM................................................. 5.00% 09/01/32 1,573,166
210,000 La Verne CA Ref Brethren Hillcrest Homes, COPS.................. 5.00% 05/15/22 231,237
45,000 Long Beach CA Bond Fin Auth Nat Gas Purchase Rev, Ser A......... 5.25% 11/15/23 52,122
325,000 Menifee CA Union Sch Dist Pub Fing Auth Spl Tax Rev Ref,
Ser A........................................................ 5.00% 09/01/28 370,773
860,000 River Islands CA Pub Fing Auth Spl Tax Ref Cmnty Facs
Dist #2003-1................................................. 5.38% 09/01/31 923,657
945,000 San Diego Cnty CA Regl Arpt Auth Sr, Ser B, AMT................. 5.00% 07/01/30 1,059,024
1,250,000 San Diego Cnty CA Regl Transprtn Commission, Ser A.............. 5.00% 04/01/35 1,460,150
510,000 San Francisco City & Cnty CA Pub Utilities Commission Wstwtr
Rev, Ser B................................................... 5.00% 10/01/29 608,297
--------------
10,856,759
--------------
COLORADO - 5.9%
500,000 Base Vlg Met Dist #2 CO Ref, Ser A (c).......................... 5.50% 12/01/36 507,395
500,000 Centerra CO Met Dist #1 Spl Rev (c)............................. 5.00% 12/01/22 542,970
1,000,000 Centerra CO Met Dist #1 Spl Rev (c)............................. 5.00% 12/01/29 1,067,480
300,000 CO St Hlth Facs Auth Hosp Rev Ref Frasier Meadows Retmnt
Cmnty Proj, Ser A............................................ 5.00% 05/15/25 332,151
350,000 CO St Hlth Facs Auth Hosp Rev Ref Frasier Meadows Retmnt
Cmnty Proj, Ser A............................................ 5.00% 05/15/26 386,929
See Notes to Financial Statements Page 7
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
COLORADO (CONTINUED)
$ 605,000 CO St Hlth Facs Auth Rev Ref Covenant Retmnt Cmntys, Ser A...... 5.00% 12/01/27 $ 642,413
500,000 CO St Hlth Facs Auth Rev Ref Covenant Retmnt Cmntys, Ser A...... 5.00% 12/01/33 519,185
500,000 Copperleaf CO Met Dist #2 Ref (c)............................... 5.25% 12/01/30 514,245
500,000 Cornerstar Met Dist CO Ref, Ser A (c)........................... 3.50% 12/01/21 504,115
90,000 Denver CO Convention Ctr Hotel Auth Rev Ref Sr.................. 5.00% 12/01/24 103,433
55,000 E-470 CO Pub Highway Auth Capital Appreciation Sr, Ser B,
NATL-RE...................................................... (d) 09/01/22 48,563
250,000 Harvest Junction CO Met Dist Ref & Impt......................... 5.00% 12/01/30 261,870
100,000 Lorson Ranch Met Dist #2 CO..................................... 4.00% 12/01/24 106,452
30,000 Park Creek CO Met Dist Rev Sr, Ser A, NATL-RE................... 5.00% 12/01/24 35,080
500,000 Parker Homestead Met Dist CO Ref (c)............................ 5.63% 12/01/44 528,855
160,000 Pub Auth For CO St Energy Nat Gas Purchase Rev.................. 6.13% 11/15/23 192,726
750,000 Sierra Ridge Met Dist No 2 CO Sr, Ser A (c)..................... 4.50% 12/01/31 717,472
500,000 Southglenn CO Met Dist Spl Rev Ref (c).......................... 5.00% 12/01/30 516,535
--------------
7,527,869
--------------
CONNECTICUT - 0.9%
1,000,000 CT St Spl Tax Oblig Rev, Ser A.................................. 5.00% 08/01/33 1,122,550
--------------
FLORIDA - 9.0%
80,000 Alachua Cnty FL Hlth Facs Auth Shands Teaching Hosp & Clinics,
Ser A........................................................ 5.00% 12/01/26 91,822
200,000 Belle Isle FL Chrt Sch Lease Rev Cornerstone Chrt Academy &
Cornerstone Chrt High Sch.................................... 5.50% 10/01/22 209,798
300,000 Bexley CDD FL Spl Assmnt Rev.................................... 4.10% 05/01/26 293,592
605,000 Broward Cnty FL Fuel Sys Rev Ft Lauderdale Fuel Facs, Ser A,
AGM, AMT..................................................... 5.00% 04/01/22 686,457
250,000 Citizens Property Insurance Corp FL, Ser A-1.................... 5.00% 06/01/22 287,135
25,000 Escambia Cnty FL Hlth Facs Auth Baptist Hosp Inc Proj, Ser A.... 5.00% 08/15/19 26,654
280,000 Escambia Cnty FL Hlth Facs Auth Baptist Hosp Inc Proj, Ser A.... 5.50% 08/15/24 309,574
600,000 Harmony FL CDD Capital Impt Rev Ref, Ser 2015................... 4.75% 05/01/25 594,492
370,000 Heritage Harbour FL N CDD Capital Impt Rev Ref Sr Lien,
Ser A-1, AGM................................................. 5.00% 05/01/25 431,401
125,000 Hollywood FL Cmnty Redev Agy Redev Rev Ref...................... 5.00% 03/01/23 142,719
1,080,000 Lakeland FL Hosp Sys Rev Lakeland Regl Hlth..................... 5.00% 11/15/33 1,190,959
1,400,000 Mediterra FL S CDD Capital Impt Rev Ref......................... 5.10% 05/01/31 1,499,834
500,000 Miami FL Hlth Facs Auth Ref Miami Jewish Hlth Sys Oblig Grp..... 5.00% 07/01/23 546,725
520,000 Miami FL Hlth Facs Auth Ref Miami Jewish Hlth Sys Oblig Grp..... 5.00% 07/01/25 567,221
500,000 Miami FL Spl Oblg Ref (a)....................................... 5.00% 03/01/30 553,365
375,000 Miami World Ctr CDD FL Spl Assmnt............................... 4.00% 11/01/23 378,923
275,000 Miami World Ctr CDD FL Spl Assmnt............................... 4.75% 11/01/27 281,498
825,000 Orange Cnty FL Hlth Facs Auth Rev Ref Presbyterian Retmnt
Cmntys....................................................... 5.00% 08/01/31 912,277
55,000 Port Saint Lucie FL Cmnty Redev Agy Rev Ref..................... 5.00% 01/01/23 64,238
120,000 Sarasota Cnty FL Hlth Facs Auth Retmnt Fac Rev Ref Vlg of Isle
Proj......................................................... 5.00% 01/01/26 135,930
1,500,000 SE Overtown Park W Cmnty Redev Agy FL Tax, Ser A-1 (a).......... 5.00% 03/01/30 1,614,750
235,000 Seven Oaks FL Cmnty Dev Dist Spl Assmnt Rev Ref Sr, Ser A-1..... 4.00% 05/01/24 248,207
230,000 Seven Oaks FL Cmnty Dev Dist Spl Assmnt Rev Ref Sr, Ser B-1..... 4.00% 05/01/24 243,669
100,000 UCF Stadium Corp FL Rev Ref, Ser A.............................. 5.00% 03/01/24 116,967
75,000 Vlg FL CDD #6 Spl Assmnt Rev Ref................................ 4.00% 05/01/25 80,406
--------------
11,508,613
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
GEORGIA - 2.9%
$ 315,000 East Point GA Tax Allocation Ref................................ 5.00% 08/01/21 $ 350,815
1,000,000 Fulton Cnty GA Rsdl Care Facs Elderly Auth Retmnt Fac Rev
Ref Lenbrook Square Fdtn Inc................................. 5.00% 07/01/31 1,089,110
725,000 GA St, Ser A-Tranche 2.......................................... 5.00% 02/01/27 887,596
40,000 Gainesville & Hall Cnty GA Hosp Auth Ref NE GA Hlth Sys Inc
Proj, Ser A.................................................. 5.00% 02/15/26 46,808
470,000 Macon-Bibb Cnty GA Urban Dev Auth Academy Classical Ed Inc,
Ser A (a).................................................... 5.00% 06/15/27 472,942
175,000 Main Street Nat Gas Inc GA Gas Rev, Ser A....................... 5.50% 09/15/23 204,596
560,000 Priv Clgs & Univs Auth GA Mercer Univ Proj, Ser C............... 5.25% 10/01/27 611,638
--------------
3,663,505
--------------
GUAM - 0.1%
75,000 Guam Pwr Auth Rev Ref, Ser A, AGM............................... 5.00% 10/01/20 83,010
--------------
HAWAII - 0.3%
170,000 HI St Dept of Budget & Fin Spl Purpose Rev Ref HI Pacific
Hlth Oblig Grp, Ser B........................................ 5.00% 07/01/30 189,698
110,000 HI St Pacific Hlth Spl Purpose Rev, Ser B....................... 5.63% 07/01/30 121,903
--------------
311,601
--------------
IDAHO - 0.4%
500,000 ID St Hlth Facs Auth Rev Trinity Hlth Ref, Ser D................ 5.00% 12/01/33 558,495
--------------
ILLINOIS - 2.1%
305,000 Chicago IL O'Hare International Arpt Rev Ref Gen Sr Lien,
Ser A, AMT................................................... 5.00% 01/01/30 341,575
500,000 Chicago IL Ref, Ser A........................................... 5.63% 01/01/29 518,630
25,000 Chicago IL Ref, Ser C........................................... 4.00% 01/01/22 24,386
500,000 Chicago IL Ref, Ser C........................................... 5.00% 01/01/25 503,130
285,000 Chicago IL Ref, Ser C, CABS..................................... (d) 01/01/22 229,824
145,000 IL St Fin Auth Rev Centegra Hlth Sys, Ser A..................... 5.00% 09/01/22 162,819
25,000 IL St Fin Auth Rev Central DuPage Hlth.......................... 5.00% 11/01/27 26,994
735,000 IL St Fin Auth Rev Ref Mercy Hth System Obligated Grp........... 5.00% 12/01/33 800,981
--------------
2,608,339
--------------
INDIANA - 1.2%
450,000 IN St Fin Auth Rev BHI Sr Living................................ 5.50% 11/15/26 497,952
110,000 IN St Fin Auth Rev BHI Sr Living................................ 5.50% 11/15/31 119,821
20,000 IN St Fin Auth Rev Greencroft Oblig Grp, Ser A.................. 5.00% 11/15/23 21,787
460,000 IN St Fin Auth Rev Greencroft Oblig Grp, Ser A.................. 5.75% 11/15/28 505,319
40,000 IN St Fin Auth Rev Greencroft Oblig Grp, Ser A.................. 6.00% 11/15/28 44,510
275,000 IN St Fin Auth Rev Ref Rev Cmnty Fdtn of NW IN.................. 5.00% 09/01/31 311,787
--------------
1,501,176
--------------
IOWA - 0.8%
385,000 Coralville IA Ref Annual Appropriation, Ser B................... 4.00% 05/01/24 399,834
315,000 Coralville IA Ref Annual Appropriation, Ser B................... 4.00% 05/01/26 322,160
275,000 Coralville IA, Ser E, COPS...................................... 4.00% 06/01/23 293,480
--------------
1,015,474
--------------
KANSAS - 1.2%
475,000 Hutchinson KS Hosp Facs Rev Hutchinson Regl Med Ctr Inc......... 5.00% 12/01/25 535,643
500,000 Wichita KS Hlth Care Facs Rev KS Masonic Home, Ser II-A......... 4.25% 12/01/24 494,880
475,000 Wyandotte Cnty/Kansas City KS Unif Govt Utility Sys Rev Ref &
Impt, Ser A.................................................. 5.00% 09/01/29 544,455
--------------
1,574,978
--------------
See Notes to Financial Statements Page 9
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
KENTUCKY - 2.2%
$ 1,300,000 Estrn KY Univ Gen Recpts, Ser A................................. 5.00% 04/01/25 $ 1,549,418
750,000 KY St Econ Dev Fin Auth Owensboro Med Hlth Sys, Ser A........... 6.00% 06/01/30 811,297
300,000 KY St Muni Pwr Agy Pwr Sys Rev Ref, Ser A, NATL-RE.............. 5.00% 09/01/22 344,769
50,000 Russell KY Rev Bon Secours Hlth Sys............................. 5.00% 11/01/22 58,108
--------------
2,763,592
--------------
LOUISIANA - 1.7%
390,000 LA Stadium & Exposition Dist LA Ref Sr, Ser A................... 5.00% 07/01/30 442,007
380,000 LA Stadium & Exposition Dist LA Ref Sr, Ser A................... 5.00% 07/01/31 429,981
100,000 New Orleans LA Ref.............................................. 5.00% 12/01/24 117,839
1,050,000 New Orleans LA Wtr Rev Ref...................................... 5.00% 12/01/28 1,212,918
--------------
2,202,745
--------------
MARYLAND - 2.5%
160,000 Howard Cnty MD Retmnt Cmnty Rev Ref Vantage House Fac........... 5.00% 04/01/21 168,099
500,000 Howard Cnty MD Retmnt Cmnty Rev Ref Vantage House Fac........... 5.00% 04/01/26 521,900
220,000 MD St Econ Dev Corp Econ Dev Rev Transn Facs Proj, Ser A........ 5.38% 06/01/25 236,656
500,000 MD St Hlth & Hgr Eductnl Facs Auth Rev Adventist Hlth Care
Obligated Grp, Ser A......................................... 5.50% 01/01/26 585,545
1,500,000 Prince Georges Cnty MD Rev Ref Collington Episcopal Life Care
Cmnty Inc.................................................... 5.00% 04/01/25 1,647,735
--------------
3,159,935
--------------
MASSACHUSETTS - 0.6%
700,000 MA St Dev Fin Agy Rev Umass Boston Student Hsg Proj............. 5.00% 10/01/24 788,417
--------------
MICHIGAN - 3.2%
1,000,000 Marquette MI Brd of Light & Pwr Elec Utility Sys Rev Ref,
Ser A........................................................ 5.00% 07/01/29 1,158,260
890,000 MI St Fin Auth Ltd Oblig Rev Ref College for Creative Studies
Proj......................................................... 5.00% 12/01/25 976,348
100,000 MI St Fin Auth Rev Detroit Sch Dist............................. 5.50% 06/01/21 103,354
1,000,000 MI St Fin Auth Rev Ref Loc Govt Loan Program Great Lakes
Wtr Auth, Ser D-1............................................ 5.00% 07/01/34 1,108,640
500,000 MI St Fin Auth Rev Ref Loc Govt Loan Program, Ser F1............ 3.80% 10/01/22 527,765
125,000 MI St Fin Auth Rev Ref Loc Govt Loan Program, Ser F1............ 3.88% 10/01/23 132,231
--------------
4,006,598
--------------
MINNESOTA - 2.0%
175,000 Baytown Twp MN Lease Ref, Ser A................................. 3.00% 08/01/22 170,180
150,000 Deephaven MN Chrt Sch Lease Rev Eagle Ridge Academy Proj,
Ser A........................................................ 4.00% 07/01/24 157,130
1,000,000 North Oaks MN Sr Hsg Rev Ref Waverly Gardens Proj............... 5.00% 10/01/28 1,097,430
500,000 Saint Paul MN Hsg & Redev Auth Hlth Care Fac Rev Ref
HealthPartners Oblig Grp, Ser A.............................. 5.00% 07/01/30 571,115
500,000 Saint Paul MN Hsg & Redev Auth Hlth Care Fac Rev Ref
HealthPartners Oblig Grp, Ser A.............................. 5.00% 07/01/32 564,170
--------------
2,560,025
--------------
MISSISSIPPI - 0.4%
60,000 MS St Dev Bank Spl Oblig Magnolia Regl Hlth Ctr Proj, Ser A..... 5.00% 10/01/20 65,079
440,000 MS St Dev Bank Spl Oblig Magnolia Regl Hlth Ctr Proj, Ser A..... 6.00% 10/01/24 498,225
--------------
563,304
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
MISSOURI - 2.6%
$ 500,000 Jackson Cnty MO Spl Oblg Ref Truman Sports Complex Proj......... 5.00% 12/01/31 $ 573,890
1,270,000 Joplin MO Indl Dev Auth Hlth Facs Rev Ref Freeman Hlth
System....................................................... 5.00% 02/15/26 1,452,435
200,000 MO St Dev Fin Brd Infrastructure Facs Rev Ref Independence
MO Centerpoint Proj, Ser B................................... 5.00% 04/01/28 225,278
200,000 MO St Hlth & Eductnl Facs Auth Eductnl Facs Rev St Louis Clg
Pharmacy, Ser B.............................................. 5.00% 05/01/30 217,414
10,000 MO St Hlth & Eductnl Facs Auth Lutheran Sr Svcs................. 5.00% 02/01/23 11,301
500,000 MO St Hlth & Eductnl Facs Auth Sr Living Facs Lutheran Sr....... 5.38% 02/01/35 523,900
250,000 Saint Charles Cnty MO Pub Wtr Sply Dist #2 Ref, COPS............ 5.00% 12/01/28 292,093
--------------
3,296,311
--------------
MONTANA - 0.4%
500,000 Kalispell MT Hsg & Hlthcare Facs Rev Ref Immanuel Lutheran
Corp Proj Temps 50, Ser B.................................... 3.40% 11/15/22 500,285
--------------
NEBRASKA - 1.1%
1,245,000 Central Plains Energy Proj NE Gas Proj Rev Proj #3.............. 5.00% 09/01/27 1,379,647
--------------
NEVADA - 1.3%
1,130,000 Clark Cnty NV Impt Dist Ref Spl Loc Impt #151................... 4.50% 08/01/23 1,179,291
475,000 Las Vegas NV Spl Impt Dist #808 & #810 Ref...................... 5.00% 06/01/22 511,765
--------------
1,691,056
--------------
NEW JERSEY - 2.4%
500,000 NJ St Econ Dev Auth Ref, Ser A, BAM............................. 5.00% 06/15/23 541,245
1,500,000 NJ St Hlth Care Facs Fing Auth Rev Ref Hackensack Meridian
Hlth, Ser A.................................................. 5.00% 07/01/24 1,775,730
100,000 NJ St Transit Corp, Ser A, GANS................................. 5.00% 09/15/21 108,894
525,000 NJ St Transprtn Trust Fund Auth Transn Sys, Ser D............... 5.25% 12/15/23 573,641
30,000 NJ St Transprtn Trust Fund Auth Transprtn Sys, Ser A............ 5.00% 06/15/24 32,225
--------------
3,031,735
--------------
NEW YORK - 3.0%
100,000 Buffalo & Erie Cnty NY Indl Land Dev Corp Rev Ref Orchard
Park......................................................... 5.00% 11/15/22 110,502
115,000 Buffalo & Erie Cnty NY Indl Land Dev Corp Rev Ref Orchard
Park......................................................... 5.00% 11/15/24 127,944
1,000,000 Met Transprtn Auth NY Rev Ref Transptrn, Subser C-1............. 5.00% 11/15/34 1,143,100
1,000,000 New York City NY Transitional Fin Auth Rev Future Tax Secured
Sub Fiscal 2016, Ser A-1..................................... 5.00% 08/01/37 1,140,370
300,000 NY St Dorm Auth Revs Non St Supported Debt Ref Orange Regl
Med Ctr (a).................................................. 5.00% 12/01/25 337,824
195,000 NY St Dorm Auth Revs Non St Supported Debt Unrefunded Pace
Univ, Ser A.................................................. 4.00% 05/01/22 209,506
85,000 NY St Dorm Auth Revs Non St Supported Debt Unrefunded Pace
Univ, Ser A.................................................. 5.00% 05/01/23 95,603
15,000 Suffolk Cnty NY Econ Dev Corp Rev Prerefunded Catholic Hlth
Svcs Long Island Oblig Grp Proj.............................. 5.00% 07/01/28 17,182
85,000 Suffolk Cnty NY Econ Dev Corp Rev Unrefunded Catholic Hlth
Svcs Long Island Oblig Grp Proj.............................. 5.00% 07/01/28 92,329
500,000 TSASC Inc NY Ref, Ser A......................................... 5.00% 06/01/29 574,205
--------------
3,848,565
--------------
See Notes to Financial Statements Page 11
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA - 0.8%
$ 900,000 NC St Capital Facs Fin Agy Student Rev Ref Hsg NC A&T Univ
Fndtn Proj, Ser A, AGC....................................... 5.00% 06/01/26 $ 1,028,943
--------------
NORTH DAKOTA - 0.2%
225,000 Burleigh Cnty ND Hlth Care Rev St Alexius Med Ctr Proj, Ser A... 5.00% 07/01/22 256,941
--------------
OHIO - 3.1%
1,000,000 Chillicothe OH City Sch Dist Ref, AGM........................... 4.00% 12/01/31 1,070,820
500,000 Cleveland OH Pub Pwr Sys Rev Ref, Ser A, AGM.................... 5.00% 11/15/24 596,700
700,000 Hamilton Cnty OH Hlth Care Facs Rev Christ Hosp Proj............ 5.25% 06/01/27 794,822
1,000,000 OH St Hgr Edu, Ser A............................................ 5.00% 05/01/33 1,166,730
230,000 S Estrn OH Port Auth Hosp Facs Rev Ref Mem Hlth Sys............. 5.00% 12/01/23 252,517
--------------
3,881,589
--------------
OKLAHOMA - 1.2%
1,000,000 Tulsa Cnty OK Indl Auth Sr Living Cmnty Rev Ref Montereau
Inc Proj..................................................... 5.00% 11/15/25 1,100,520
250,000 Tulsa Cnty OK Indl Auth Sr Living Cmnty Rev Ref Montereau
Inc Proj..................................................... 5.00% 11/15/26 274,640
100,000 Tulsa OK Arpts Impt Trust Ref, Ser D, BAM....................... 5.00% 06/01/28 109,569
--------------
1,484,729
--------------
OREGON - 1.8%
275,000 Multnomah Cnty OR Hosp Facs Auth Rev Ref Terwilliger Plaza...... 5.00% 12/01/20 303,746
1,100,000 OR St Facs Auth Rev Ref Univ Portland, Ser A.................... 5.00% 04/01/32 1,251,393
700,000 Yamhill Cnty OR Hosp Auth Ref Friendsview Retmnt Cmnty, Ser A... 5.00% 11/15/31 726,880
--------------
2,282,019
--------------
PENNSYLVANIA - 6.2%
600,000 Bucks Cnty PA Indl Dev Auth Ref Sch Lane Chrt Sch Proj.......... 5.00% 03/15/26 657,054
500,000 Chester Cnty PA Indl Dev Auth Renaissance Academy Chrt Sch...... 5.00% 10/01/34 533,760
500,000 Colonial PA Sch Dist............................................ 5.00% 02/15/36 558,630
300,000 Cumberland Cnty PA Muni Auth Ref Diakon Lutheran Ministries
Proj......................................................... 5.00% 01/01/30 330,132
700,000 Cumberland Cnty PA Muni Auth Ref Diakon Lutheran Ministries
Proj......................................................... 5.00% 01/01/38 733,985
750,000 E Hempfield Twp PA Indl Dev Auth Ref Willow Valley Cmntys
Proj......................................................... 5.00% 12/01/29 844,560
500,000 Middletown PA Sch Dist, Ser A................................... 5.00% 03/01/28 568,690
925,000 Montgomery Cnty PA Indl Dev Auth Acts Retmnt Life Cmntys
Ref.......................................................... 5.00% 11/15/25 1,022,652
50,000 Montgomery Cnty PA Indl Dev Auth Acts Retmnt Life Cmntys
Ref.......................................................... 5.00% 11/15/29 54,396
100,000 Northampton Cnty PA Gen Purpose Auth Clg Rev Ref Moravian
Clg.......................................................... 5.00% 10/01/25 114,448
1,000,000 PA St Turnpike Commission Turnpike Rev Ref...................... 5.00% 12/01/33 1,120,250
290,000 Philadelphia PA Gas Works Rev Ref............................... 5.00% 08/01/25 340,866
500,000 Philadelphia PA Ref, Ser A...................................... 5.25% 07/15/28 578,310
405,000 Southcentrl PA General Auth Rev Ref Hanover Hosp Inc............ 5.00% 12/01/23 457,662
--------------
7,915,395
--------------
RHODE ISLAND - 0.2%
265,000 Tobacco Settlement Fing Corp RI Ref, Ser A...................... 5.00% 06/01/24 299,829
--------------
Page 12 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
SOUTH CAROLINA - 1.9%
$ 1,000,000 Greenville SC Hosp Sys Brd Hosp Facs Rev, Ser B................. 5.00% 05/01/30 $ 1,139,550
200,000 Lancaster Cnty SC Assmnt Rev Ref Walnut Creek Impt Dist,
Ser A-1...................................................... 3.13% 12/01/22 196,524
745,000 Piedmont SC Muni Pwr Agy Elec Rev Ref, Ser A-3.................. 5.00% 01/01/23 828,522
30,000 SC St Jobs Econ Dev Auth Hosp Rev Ref Palmetto Hlth, Ser A...... 5.00% 08/01/23 34,347
150,000 SC St Jobs Econ Dev Auth Hosp Rev Ref Palmetto Hlth, Ser A,
AGM.......................................................... 5.50% 08/01/24 172,313
--------------
2,371,256
--------------
SOUTH DAKOTA - 0.9%
30,000 SD St Hlth & Eductnl Facs Auth Avera Hlth, Ser B................ 5.50% 07/01/35 31,230
1,000,000 SD St Hlth & Eductnl Facs Auth Sanford Oblig Grp, Ser B......... 5.00% 11/01/34 1,101,590
--------------
1,132,820
--------------
TENNESSEE - 2.2%
335,000 Chattanooga TN Hlth Eductnl & Hsg Fac Brd Rev Ref Student
Hsg CDFI Phase I............................................. 5.00% 10/01/23 385,391
600,000 Memphis Shelby Cnty TN Arpt Auth Arpt Rev Ref, Ser B, AMT....... 5.75% 07/01/23 660,816
1,385,000 Met Govt Nashville & Davidson Cnty TN Hlth & Eductnl Fac Brd
Ref Lipscomb Univ Proj, Ser A................................ 5.00% 10/01/29 1,565,728
25,000 TN St Energy Acquisition Corp Gas Rev, Ser A.................... 5.25% 09/01/21 28,530
120,000 TN St Energy Acquisition Corp Gas Rev, Ser A.................... 5.25% 09/01/22 139,416
--------------
2,779,881
--------------
TEXAS - 8.2%
600,000 Brd of Managers TX Joint Guadalupe Cnty City of Seguin Hosp
Mtg Ref...................................................... 5.00% 12/01/24 655,260
600,000 Centrl TX Regl Mobility Auth Rev Ref Sub Lien................... 5.00% 01/01/33 655,164
600,000 Flower Mound TX Spl Assmnt Rev River Walk Pub Impt Dist #1...... 6.13% 09/01/28 610,584
1,100,000 Harris Cnty TX Ref Sr Lien Toll Road, Ser B..................... 5.00% 08/15/36 1,250,744
500,000 Houston TX Arpt Sys Rev Ref United Airls Inc Terminal E Proj,
AMT.......................................................... 4.50% 07/01/20 516,030
1,000,000 Houston TX Arpt Sys Rev Ref, Ser B-2, AMT....................... 5.00% 07/15/20 1,047,460
500,000 Mission TX Econ Dev Corp Rev Sr Lien Nat Gasoline Proj, Ser B,
AMT (b)...................................................... 5.75% 10/01/31 524,705
1,000,000 N TX Tollway Auth Rev Ref Sys Second Tier, Ser B................ 5.00% 01/01/31 1,130,210
170,000 New Hope Cultural Edu Facs Fin Corp TX Student Hsg Rev Chf
Collegiate Hsg Corpus Christii LLC TX A&M Univ............... 5.00% 04/01/39 178,320
500,000 New Hope Cultural Edu Facs Fin Corp TX Student Hsg Rev Chf
Collegiate Hsg Galveston I LLC TX A&M Univ Galveston......... 5.00% 04/01/22 553,030
25,000 New Hope Cultural Edu Facs Fin Corp TX Student Hsg Rev Chf
Stephenville-Tarleton St Univ Proj, Ser A.................... 4.25% 04/01/22 26,974
495,000 Red River TX Hlth Facs Dev Corp Retmnt Fac Rev MRC
Crestview, Ser A............................................. 7.75% 11/15/31 630,595
600,000 TX St Muni Gas Acquisition & Sply Corp III Gas Sply Rev......... 5.00% 12/15/24 672,450
500,000 TX St Muni Gas Acquisition & Sply Corp III Gas Sply Rev......... 5.00% 12/15/31 536,080
500,000 TX St Transprtn Commission Central TX Turnpike Sys Rev Ref,
Ser B........................................................ 5.00% 08/15/37 554,265
500,000 Viridian TX Muni Mgmt Dist Ref Utility Impt, BAM................ 6.00% 12/01/26 622,460
155,000 Viridian TX Muni Mgmt Dist Road Impt, BAM....................... 5.00% 12/01/26 176,492
125,000 Viridian TX Muni Mgmt Dist Utility Impt, BAM.................... 5.00% 12/01/26 142,332
--------------
10,483,155
--------------
See Notes to Financial Statements Page 13
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
MUNICIPAL BONDS (CONTINUED)
UTAH - 0.4%
$ 500,000 UT St Chrt Sch Fin Auth Chrt Sch Rev Spectrum Academy
Proj (a)..................................................... 6.00% 04/15/45 $ 516,725
--------------
VERMONT - 0.5%
550,000 Burlington VT Ref Lakeview Garage Proj, Ser A, COPS............. 5.00% 12/01/24 606,408
--------------
WASHINGTON - 3.1%
1,250,000 Centrl Puget Sound WA Regl Transprtn Auth Sales & Use Tax
Green Bond Ref & Impt, Ser S-1............................... 5.00% 11/01/35 1,442,312
1,250,000 Energy NW WA Elec Rev Ref Columbia Generating Sys, Ser A........ 5.00% 07/01/38 1,422,937
155,000 Mason Cnty WA Pub Utility Dist #1 Sys........................... 3.50% 12/01/21 162,279
270,000 Skagit Cnty WA Pub Hosp Dist #1 Ref & Impt Skagit Regl Hlth..... 4.00% 12/01/24 285,733
110,000 Skagit Cnty WA Pub Hosp Dist #1 Ref & Impt, Ser A............... 5.00% 12/01/22 122,234
165,000 Skagit Cnty WA Pub Hosp Dist #1 Skagit Valley Hosp.............. 5.00% 12/01/20 178,913
250,000 Tobacco Settlement Auth WA Tobacco Settlement Rev Ref........... 5.00% 06/01/23 287,313
35,000 WA St Hsg Fin Commission Ref Emerald Heights Proj............... 5.00% 07/01/22 39,428
50,000 WA St Hsg Fin Commission Ref Emerald Heights Proj............... 5.00% 07/01/28 55,585
--------------
3,996,734
--------------
WISCONSIN - 3.0%
1,000,000 Pub Fin Auth WI Exempt Facs Rev Ref Celanese Proj, Ser B,
AMT.......................................................... 5.00% 12/01/25 1,110,290
500,000 Pub Fin Auth WI Sr Living Rev Ref Mary's Woods At Marylhurst
Proj, Ser B-2 (a)............................................ 3.50% 11/15/23 501,265
500,000 WI St Hlth & Eductnl Facs Auth Rev Ref Marquette Univ........... 5.00% 10/01/28 571,315
1,175,000 WI St Hlth & Eductnl Facs Auth Rev Ref Prohealth Care Oblig
Grp.......................................................... 5.00% 08/15/31 1,326,035
175,000 WI St Hlth & Eductnl Facs Auth Rev Ref Prohealth Care Oblig
Grp.......................................................... 5.00% 08/15/33 195,312
100,000 WI St Hlth & Eductnl Facs Auth Rev Ref St Johns Cmntys Inc,
Ser B........................................................ 4.00% 09/15/23 105,275
--------------
3,809,492
--------------
WYOMING - 0.0%
50,000 WY Cmnty Dev Auth Student Hsg Rev Chf Wyoming LLC............... 6.25% 07/01/31 54,470
--------------
TOTAL INVESTMENTS - 93.3%.................................................................... 118,827,436
(Cost $117,076,363) (e)
NET OTHER ASSETS AND LIABILITIES - 6.7%...................................................... 8,584,217
--------------
NET ASSETS - 100.0%.......................................................................... $ 127,411,653
==============
Page 14 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
-----------------------------
(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 (the "1933 Act"), 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"), 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 April 30, 2017,
securities noted as such amounted to $7,072,566 or 5.6% of net assets.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 1933 Act,
and may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2C - Restricted Securities in the
Notes to Financial Statements).
(c) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by First Trust.
(d) Zero coupon bond.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $2,032,567 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $281,494.
AGC Assured Guaranty Corp.
AGM Assured Guaranty Municipal Corp.
AMT Alternative Minimum Tax
BAM Building America Mutual
CABS Capital Appreciation Bonds
COPS Certificates of Participation
GANS Grant Anticipation Notes
NATL-RE National Public Finance Guarantee Corp.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUTS INPUTS
------------- ------------- -------------- --------------
Municipal Bonds*................................... $ 118,827,436 $ -- $ 118,827,436 $ --
============= ============= ============== ==============
* See Portfolio of Investments for state 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 April 30, 2017.
See Notes to Financial Statements Page 15
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 118,827,436
Cash................................................................... 11,046,983
Receivables:
Investment securities sold.......................................... 1,917,737
Interest............................................................ 1,450,146
--------------
Total Assets........................................................ 133,242,302
--------------
LIABILITIES:
Payables:
Investment securities purchased..................................... 5,792,209
Investment advisory fees............................................ 38,440
--------------
Total Liabilities................................................... 5,830,649
--------------
NET ASSETS............................................................. $ 127,411,653
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 126,672,412
Par value.............................................................. 24,500
Accumulated net investment income (loss)............................... 51,704
Accumulated net realized gain (loss) on investments.................... (1,088,036)
Net unrealized appreciation (depreciation) on investments.............. 1,751,073
--------------
NET ASSETS............................................................. $ 127,411,653
==============
NET ASSET VALUE, per share............................................. $ 52.00
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 2,450,002
==============
Investments, at cost................................................... $ 117,076,363
==============
Page 16 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Interest............................................................... $ 1,484,447
--------------
Total investment income............................................. 1,484,447
--------------
EXPENSES:
Investment advisory fees............................................... 300,975
--------------
Total expenses...................................................... 300,975
Less fees waived by the investment advisor.......................... (69,625)
--------------
Net expenses........................................................ 231,350
--------------
NET INVESTMENT INCOME (LOSS)........................................... 1,253,097
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments............................. (1,087,992)
Net change in unrealized appreciation (depreciation) on
investments...................................................... (239,618)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ (1,327,610)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ (74,513)
==============
See Notes to Financial Statements Page 17
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2017 ENDED
(UNAUDITED) 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 1,253,097 $ 1,627,430
Net realized gain (loss)............................................... (1,087,992) 310,495
Net change in unrealized appreciation (depreciation)................... (239,618) 1,504,202
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ (74,513) 3,442,127
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (1,221,001) (1,664,003)
Net realized gain...................................................... (259,841) (172,240)
-------------- --------------
Total distributions to shareholders.................................... (1,480,842) (1,836,243)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 48,917,148 47,515,355
Cost of shares redeemed................................................ (2,600,619) --
-------------- --------------
Net increase (decrease) in net assets resulting from
shareholder transactions............................................ 46,316,529 47,515,355
-------------- --------------
Total increase (decrease) in net assets................................ 44,761,174 49,121,239
NET ASSETS:
Beginning of period.................................................... 82,650,479 33,529,240
-------------- --------------
End of period.......................................................... $ 127,411,653 $ 82,650,479
============== ==============
Accumulated net investment income (loss) at end of period.............. $ 51,704 $ 19,608
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 1,550,002 650,002
Shares sold............................................................ 950,000 900,000
Shares redeemed........................................................ (50,000) --
-------------- --------------
Shares outstanding, end of period...................................... 2,450,002 1,550,002
============== ==============
Page 18 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED OCTOBER 31, 5/13/2014 (a)
4/30/2017 ------------------------------- THROUGH
(UNAUDITED) 2016 2015 10/31/2014
-------------- -------------- -------------- --------------
Net asset value, beginning of period $ 53.32 $ 51.58 $ 51.11 $ 50.00
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.67 1.32 1.35 0.56
Net realized and unrealized gain (loss) (1.17) 1.99 0.50 1.20
---------- ---------- ---------- ----------
Total from investment operations (0.50) 3.31 1.85 1.76
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.66) (1.35) (1.38) (0.55)
Net realized gain (0.16) (0.22) -- --
Return of capital -- -- -- (0.10)
---------- ---------- ---------- ----------
Total distributions (0.82) (1.57) (1.38) (0.65)
---------- ---------- ---------- ----------
Net asset value, end of period $ 52.00 $ 53.32 $ 51.58 $ 51.11
========== ========== ========== ==========
TOTAL RETURN (b) (0.90)% 6.47% 3.66% 3.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 127,412 $ 82,650 $ 33,529 $ 20,445
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.65% (c) 0.65% 0.65% 0.65% (c)
Ratio of net expenses to average net assets 0.50% (c) 0.52% 0.65% 0.65% (c)
Ratio of net investment income (loss) to
average net assets 2.71% (c) 2.52% 2.63% 2.40% (c)
Portfolio turnover rate (d) 59% 85% 109% 69%
(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. For some periods, the total returns would have been
lower if certain fees had not been waived by the advisor.
(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.
See Notes to Financial Statements Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on January 9,
2008, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust consists of ten funds that are currently offering shares. This report
covers the First Trust Managed Municipal ETF (the "Fund"), a non-diversified
series of the Trust, which trades under the ticker FMB 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 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 generate current income that
is exempt from regular federal income taxes and its secondary objective is
long-term capital appreciation. Under normal market conditions, the Fund seeks
to achieve its investment objectives by investing at least 80% of its net assets
(including investment borrowings) in municipal debt securities that pay interest
that is exempt from regular federal income taxes. There can be no assurance that
the Fund will achieve its investment objectives. 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 ("FASB")
Accounting Standards Codification ("ASC") 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 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:
Municipal securities and other debt securities are fair valued on the
basis of fair 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.
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:
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
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 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 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 (or
equity 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; and
10) 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 April 30, 2017, 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.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
C. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2017, the Fund held restricted securities
as shown in the following table that the Advisor has deemed illiquid pursuant to
procedures adopted by the Fund's Board of Trustees. 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. The Fund does not have the right to demand
that such securities be registered. These securities are valued according to the
valuation procedures as stated in the Portfolio Valuation note (Note 2A) and are
not expressed as a discount to the carrying value of a comparable unrestricted
security. There are no unrestricted securities with the same maturity dates and
yields for these issuers.
ACQUISITION PRINCIPAL CURRENT CARRYING % OF NET
SECURITY DATE VALUE PRICE COST VALUE ASSETS
------------------------------------------------------------------------------------------------------------------------------
CA Stwd Cmntys Dev Auth Rev Ref Lancer
Eductnl Student Hsg Proj, Ser A 11/02/16 $ 500,000 $ 103.77 $ 509,426 $ 518,825 0.41%
Mission TX Econ Dev Corp Rev Sr Lien Nat
Gasoline Proj, Ser B 04/28/16 500,000 104.94 478,694 524,705 0.41
------------- ------------- ---------
$ 988,120 $ 1,043,530 0.82%
============= ============= =========
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and 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 net asset value
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 year ended October 31,
2016, was as follows:
Distributions paid from:
Ordinary income.................................... $ 171,141
Long-term capital gains............................ 53,893
Tax-exempt income.................................. 1,611,209
Return of capital.................................. --
As of October 31, 2016, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income...................... $ 259,797
Accumulated capital and other gains................ 19,608
Net unrealized appreciation (depreciation)......... 1,990,691
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.
In addition, the Fund intends to invest in such municipal securities to allow it
to pay shareholders "exempt dividends" as defined in the Internal Revenue Code.
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 April 30, 2017,
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.
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
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 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 no non-expiring capital loss carryforwards for federal income tax
purposes.
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.
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 are 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.
H. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
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 0.65% of its average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250, which is covered under the annual unitary
management fee.
The Trust's Board of Trustees and the Advisor have entered into a Fee Waiver
Agreement for the Fund pursuant to which the Advisor contractually agreed to
waive management fees of 0.15% 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. First Trust
does not have the right to recover the fees waived. During the six months ended
April 30, 2017, the Advisor waived fees of $69,625.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
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 six months ended April 30, 2017, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
were $96,250,667 and $52,632,028, respectively.
For the six months ended April 30, 2017, the Fund had no in-kind transactions.
5. BORROWINGS
The Trust, on behalf of the Fund, along with First Trust Series Fund and First
Trust Exchange-Traded Fund IV have a $220 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 excess of the
commitment amount over the outstanding principal balance of the loans and an
agency fee. Prior to March 9, 2017, the commitment amount was $180 million.
Prior to December 16, 2016, the commitment amount was $140 million. First Trust
allocates the commitment fee and agency 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 six months ended April 30, 2017.
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. 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 BBH, 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 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 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 BBH, 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.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
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 February 28, 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 EVENT
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there was
the following subsequent event:
On May 22, 2017, the Fund declared a distribution of $0.11 per share to
shareholders of record on May 25, 2017, payable May 31, 2017.
Page 25
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of 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.
RISK CONSIDERATIONS
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.
ALTERNATIVE MINIMUM TAX RISK. The Fund has no limit as to the amount that can be
invested in alternative minimum tax bonds. Therefore, all or a portion of the
Fund's otherwise exempt-interest dividends may be taxable to those shareholders
subject to the federal alternative minimum tax.
AUTHORIZED PARTICIPANT CONCENTRATION RISK. Only an authorized participant may
engage in creation or redemption transactions directly with the Fund. The Fund
has a limited number of institutions that act as authorized participants. To the
extent that these institutions exit the business or are unable to proceed with
creation and/or redemption orders with respect to the Fund and no other
authorized participant is able to step forward to create or redeem, in either of
these cases, Fund shares may trade at a discount to the Fund's net asset value
and possibly face delisting.
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
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
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.
CUSTODIAL RECEIPT TRUSTS RISK. Custodial receipts are financial instruments
similar to tender option bonds ("TOB") sold through private placements that
represent the right to receive future principal and interest payments on
underlying municipal obligations. Custodial receipt trusts may issue inverse
floater securities and if an Underlying Fund were to hold inverse floaters
issued by custodial receipt trusts, the Underlying Fund would be subject to the
risks of inverse floaters described herein. In particular, because the
instruments may be leveraged, their market values may be more volatile than
other types of fixed-income instruments.
CYBER SECURITY RISK. As the use of Internet technology has become more prevalent
in the course of business, the Fund has become more susceptible to potential
operational risks through breaches in cyber security. A breach in cyber security
refers to both intentional and unintentional events that may cause the Fund to
lose proprietary information, suffer data corruption or lose operational
capacity. Such events could cause the Fund to incur regulatory penalties,
reputational damage, additional compliance costs associated with corrective
measures and/or financial loss. Cyber security breaches may involve unauthorized
access to the Fund's digital information systems through "hacking" or malicious
software coding, but may also result from outside attacks such as
denial-of-service attacks through efforts to make network services unavailable
to intended users. In addition, cyber security breaches of the Fund's third
party service providers, such as its administrator, transfer agent, custodian,
or sub-advisor, as applicable, or issuers in which the Fund invests, can also
subject the Fund to many of the same risks associated with direct cyber security
breaches. The Fund has established risk management systems designed to reduce
the risks associated with cyber security. However, there is no guarantee that
such efforts will succeed, especially because the Fund does not directly control
the cyber security systems of issuers or third party service providers.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
FLUCTUATION OF NET ASSET VALUE RISK. The net asset value of shares of the Fund
will generally fluctuate with changes in the market value of the Fund's
holdings. The market prices of shares will generally fluctuate in accordance
with changes in net asset value as well as the relative supply of and demand for
shares on Nasdaq. The Fund's investment advisor cannot predict whether shares
will trade below, at or above their net asset value because the shares trade on
Nasdaq at market prices and not at net asset value. Price differences may be
due, in large part, to the fact that supply and demand forces at work in the
secondary trading market for shares will be closely related to, but not
identical to, the same forces influencing the prices of the holdings of the Fund
trading individually or in the aggregate at any point in time. However, given
that shares can only be purchased and redeemed for cash, or in certain
circumstances, in-kind, in Creation Units, and only to and from broker-dealers
and large institutional investors that have entered into participation
agreements (unlike shares of closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net asset
value), the Fund's investment advisor believes that large discounts or premiums
to the net asset value of shares should not be sustained.
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, are considered to be highly speculative. These
securities are issued by issuers that may have 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. In
general, high yield securities may have a greater risk of default than other
types of securities.
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 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. 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.
INVERSE FLOATERS RISK. Investments in inverse floating rate securities issued by
TOB trusts create effective leverage. Due to the leveraged nature of these
investments, the value of an inverse floater will increase and decrease to a
significantly greater extent than the values of the TOB trust's underlying
municipal bonds in response to changes in market interest rates or credit
quality. In addition, distributions paid to the Fund on its inverse floaters
will be reduced or even eliminated as short-term municipal interest rates rise
and will increase when short-term municipal interest rates fall. An investment
in inverse floaters typically will involve greater risk than an investment in a
fixed rate municipal bond.
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 to 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
securities prices. Shares of the Fund could decline in value or underperform
other investments.
MARKET MAKER RISK. If the Fund has lower average daily trading volumes, it may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in the
spread between the Fund's net asset value and the price at which the Fund's
shares are trading on its exchange, which could result in a decrease in value of
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2017 (UNAUDITED)
the Fund's shares. In addition, decisions by market makers or authorized
participants to reduce their role or step away from these activities in times of
market stress could inhibit the effectiveness of the arbitrage process in
maintaining the relationship between the underlying values of the Fund's
portfolio securities and the Fund's market price. This reduced effectiveness
could result in Fund shares trading at a discount to net asset value and also in
greater than normal intraday bid-ask spreads for Fund shares.
MUNICIPAL LEASE OBLIGATIONS RISK. Participation interests in municipal leases
pose special risks because many leases and contracts contain "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
this purpose by the appropriate legislative body.
MUNICIPAL SECURITIES MARKET LIQUIDITY RISK. Inventories of Municipal Securities
held by brokers and dealers have decreased in recent years, lessening their
ability to make a market in these securities. This reduction in market making
capacity has the potential to decrease the Fund's ability to buy or sell
Municipal Securities, and increase price volatility and trading costs,
particularly during periods of economic or market stress. In addition, 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. As a result, the Fund may be forced to accept a lower price to sell a
Municipal Security, to sell other securities to raise cash, or to give up an
investment opportunity, any of which could have a negative effect on
performance.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940 Act, 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 concentrated in certain issuers.
POLITICAL AND ECONOMIC RISKS. The values of Municipal Securities held by the
Fund may be adversely affected by local political and economic conditions and
developments. Adverse conditions in an industry significant to a local economy
could have a correspondingly adverse effect on the financial condition of local
issuers.
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.
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.
TAX RISK. Interest income from Municipal Securities is normally not subject to
regular federal income tax, but income from Municipal Securities held by the
Fund could be declared taxable because of, among other things, unfavorable
changes in tax laws, adverse interpretations by the Internal Revenue Service or
state tax authorities or noncompliant conduct of a bond issuer. Consequently,
the attractiveness of Municipal Securities in relation to other investment
alternatives is affected by changes in federal income tax rates or changes in
the tax-exempt status of interest income from Municipal Securities.
TRADING ISSUES RISK. Although the shares of the Fund are listed for trading on
Nasdaq, there can be no assurance that an active trading market for such shares
will develop or be maintained. Trading in shares on Nasdaq may be halted due to
market conditions or for reasons that, in the view of Nasdaq, make trading in
shares inadvisable. In addition, trading in shares on Nasdaq is subject to
trading halts caused by extraordinary market volatility pursuant to Nasdaq
"circuit breaker" rules. Market makers are under no obligation to make a market
in the Fund's shares, and authorized participants are not obligated to submit
purchase or redemption orders for Creation Units. There can be no assurance that
the requirements of Nasdaq necessary to maintain the listing of the Fund will
continue to be met or will remain unchanged. In particular, if the Fund does not
comply with any provision of the Nasdaq rule change pursuant to Rule 19b-4 under
the Securities Exchange Act of 1934, as amended approved by the SEC, and cannot
bring itself into compliance within a reasonable period after discovering the
matter, Nasdaq may remove the shares of the Fund from listing. The Fund may have
difficulty maintaining its listing on Nasdaq in the event the Fund's assets are
small or the Fund does not have enough shareholders.
ZERO COUPON BONDS RISK. Zero coupon bonds do not pay interest on a current basis
and may be highly volatile as interest rates rise or fall. In addition, while
such bonds generate income for purposes of generally accepted accounting
standards, they do not generate cash flow and thus could cause the Fund to be
forced to liquidate securities at an inopportune time in order to distribute
cash, as required by tax laws.
Page 28
First Trust
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 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 III
--------------------------------------------------------------------------------
First Trust Long/Short Equity ETF (FTLS)
Semi-Annual Report
For the Six Months Ended
April 30, 2017
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
SEMI-ANNUAL REPORT
APRIL 30, 2017
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 16
Statement of Operations...................................................... 17
Statements of Changes in Net Assets.......................................... 18
Financial Highlights......................................................... 19
Notes to Financial Statements................................................ 20
Additional Information....................................................... 25
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 III (the "Trust") described in
this report for the First Trust Long/Short Equity 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 by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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.
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 its prospectus, statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2017
Dear Shareholders:
Thank you for your investment in First Trust Long/Short Equity ETF (the "Fund").
The year 2016 was a historic year all over the world. Many will remember some of
the events that occurred during the year: from the Brexit vote in the UK to
leave the European Union, to the results of the U.S. Presidential Election which
seemed unlikely at the beginning of 2016, to the first World Series Championship
for the Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment.
Additionally, First Trust has compiled the Fund's financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
On November 8, 2016, Donald J. Trump was elected to become the 45th president in
our country's history. As I write this, he has just hit his 100th day in office,
always a historic marker for pundits, politicians, and voters. While no one has
a crystal ball and the ability to predict how the Trump administration will
shape the United States (and the world), there is no doubt that his populist
message resonated for many Americans. His message of improving lives for the
"average" American, while reducing the size and scope of the federal government,
also won him millions of votes. Many of his supporters believe that with his
background in business, Trump will make policy changes that will continue to
grow the economy and spur stock markets even higher. Many analysts predicted the
Dow Jones Industrial Average would hit a new benchmark, 20,000, in the first
days of the New Year. It took until January 25, 2017, but the Dow finally traded
over 20,000 on that day. On March 1, 2017, the Dow went past 21,000, a new
record. As with all change and a new administration, only time will tell where
our economy and the markets will go.
As of December 31, 2016, the S&P 500(R) Index (the "Index") was up 11.96% for
the year, on a total return basis, as measured by Bloomberg. As of April 30,
2017, the Index was up 7.16% (calendar year-to-date). The current bull market
(measuring from March 9, 2009 through April 28, 2017) is the second longest in
history, but lags the longest bull market by 4.17 years, according to Bespoke
Investment Group. We remain bullish on the economy, but continue to have a
long-term perspective. We believe investors should think long-term as well,
since no one can predict volatility and the inevitable ups and downs that occur
in the market.
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 our relentless focus
on bringing the types of investments that we believe could help 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 LONG/SHORT EQUITY ETF (FTLS)
The investment objective of First Trust Long/Short Equity ETF (the "Fund") is to
seek to provide investors with long-term total return. The Fund pursues its
objective by establishing long and short positions in a portfolio of Equity
Securities (as defined below). Under normal circumstances, at least 80% of the
Fund's net assets (including investment borrowings) will be exposed to U.S.
exchange-listed equity securities of U.S. and foreign companies by investing in
such securities directly and/or in U.S. exchange-traded funds ("ETFs") that
provide exposure to such securities. The securities of the companies and ETFs in
which the Fund will invest are referred to collectively as "Equity Securities."
The Equity Securities held by the Fund may include U.S. exchange-listed equity
securities of foreign issuers, as well as investments in the equity securities
of foreign issuers that are in the form of depositary receipts.
The Fund takes long and short positions in Equity Securities. As opposed to
taking long positions in which an investor seeks to profit from increases in the
price of a security, short selling is a technique that will be used by the Fund
to try and profit from the falling price of a security. Short selling involves
selling a security that has been borrowed from a third party with the intention
of buying an identical security back at a later date to return to that third
party.
Having both long and short positions in an equity security portfolio is a common
way to create returns that are independent of market moves. One advantage of a
long and short portfolio is that the long and short positions may offset one
another in a manner that results in a lower net exposure to the direction of the
market. In addition, cash balances arising from the use of short selling
typically will be held in money market instruments.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (9/8/14) Inception (9/8/14)
4/30/17 4/30/17 to 4/30/17 to 4/30/17
FUND PERFORMANCE
NAV 9.78% 12.95% 7.44% 20.87%
Market Price 9.71% 13.02% 7.44% 20.86%
INDEX PERFORMANCE
S&P 500(R) Index 13.32% 17.92% 9.11% 25.90%
----------------------------------------------------------------------------------------------------------------------------------
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 price 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 LONG/SHORT EQUITY ETF (FTLS)
-----------------------------------------------------------
% OF
LONG-TERM
PORTFOLIO SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Information Technology 16.1%
Industrials 16.1
Health Care 13.2
Consumer Discretionary 12.9
Financials 11.0
Consumer Staples 10.1
Real Estate 7.8
Energy 6.7
Telecommunication Services 3.4
Materials 2.7
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF
INVESTMENTS
PORTFOLIO SECTOR ALLOCATION SOLD SHORT
-----------------------------------------------------------
Industrials 13.8%
Health Care 13.3
Real Estate 12.7
Information Technology 12.3
Energy 10.5
Financials 9.8
Materials 8.5
Consumer Staples 7.0
Consumer Discretionary 6.7
Telecommunication Services 5.4
-------
Total 100.0%
=======
-----------------------------------------------------------
TOP TEN LONG-TERM INVESTMENTS % OF NET ASSETS
-----------------------------------------------------------
Apple, Inc. 3.3%
AdvancePierre Foods Holdings, Inc. 2.3
Adobe Systems, Inc. 2.2
Masimo Corp. 2.1
Toro (The) Co. 2.1
Equity LifeStyle Properties, Inc. 2.1
Allegion PLC 2.0
TC Pipelines, L.P. 2.0
Visa, Inc., Class A 2.0
Boeing (The) Co. 2.0
-------
Total 22.1%
=======
-----------------------------------------------------------
TOP TEN INVESTMENTS SOLD SHORT % OF NET ASSETS
-----------------------------------------------------------
SPDR S&P 500 ETF Trust -2.0%
Liberty Expedia Holdings, Inc. -0.4
Telephone & Data Systems, Inc. -0.4
Praxair, Inc. -0.4
Phillips 66 -0.4
Piedmont Office Realty Trust, Inc. -0.4
Mondelez International, Inc., Class A -0.4
Hess Corp. -0.4
Ashland Global Holdings, Inc. -0.4
Coca-Cola (The) Co. -0.4
-------
Total -5.6%
=======
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
SEPTEMBER 8, 2014 - APRIL 30, 2017
First Trust Long/Short S&P 500(R)
Equity ETF S&P 500 Index
9/8/14 $10,000 $10,000
10/31/14 10,186 10,105
4/30/15 10,895 10,550
10/31/15 10,960 10,631
4/30/16 10,701 10,676
10/31/16 11,009 11,109
4/30/17 12,086 12,589
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 APRIL 30, 2017
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 September 9, 2014
(commencement of trading) through April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
9/9/14 - 10/31/14 23 3 0 0
11/1/14 - 10/31/15 190 7 0 1
11/1/15 - 10/31/16 170 0 0 0
11/1/16 - 4/30/17 92 0 0 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
9/9/14 - 10/31/14 9 4 0 0
11/1/14 - 10/31/15 41 12 0 0
11/1/15 - 10/31/16 81 1 0 0
11/1/16 - 4/30/17 31 0 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
SEMI-ANNUAL REPORT
APRIL 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor that offers
customized portfolio management using its structured, quantitative approach to
security selection. As of April 30, 2017, First Trust managed or supervised
$105.533 billion in assets.
The First Trust Alternatives & Active Management Team was formed in July of 2011
and is headed by John Gambla, CFA, FRM, PRM and Rob Guttschow, CFA. Prior to
joining First Trust, Messrs. Gambla and Guttschow were Co-Chief Investment
Officers at Nuveen Hyde Park, a quantitative money manager. The team focuses on
systematic and disciplined strategies using a variety of statistical techniques
along with a fundamental overlay based upon their combined 40+ years of
investment experience. Currently the team manages/consults for a variety of
portfolios structured as exchange-traded funds and separately managed accounts
in the United States.
PORTFOLIO MANAGEMENT TEAM
JOHN GAMBLA - CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER OF FIRST TRUST, FIRST
TRUST ALTERNATIVES & ACTIVE MANAGEMENT TEAM
ROB GUTTSCHOW - CFA, SENIOR PORTFOLIO MANAGER OF FIRST TRUST, FIRST TRUST
ALTERNATIVES & ACTIVE MANAGEMENT TEAM
Page 5
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2017 (UNAUDITED)
As a shareholder of First Trust Long/Short Equity 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 April 30, 2017.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
----------------------------------------------------------------------------------------------------------------------------
ANNUALIZED EXPENSES PAID
BEGINNING ENDING EXPENSE RATIO DURING THE
ACCOUNT VALUE ACCOUNT VALUE BASED ON THE SIX-MONTH
NOVEMBER 1, 2016 APRIL 30, 2017 SIX-MONTH PERIOD PERIOD (a)
----------------------------------------------------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF
Actual $1,000.00 $1,097.80 1.42% $7.39
Hypothetical (5% return before expenses) $1,000.00 $1,017.75 1.42% $7.10
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2016 through April 30, 2017), and multiplied by 181/365.
Page 6
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS - 77.3%
AEROSPACE & DEFENSE - 2.5%
12,014 Boeing (The) Co............................................................................ $ 2,220,548
2,113 TransDigm Group, Inc....................................................................... 521,340
--------------
2,741,888
--------------
AIR FREIGHT & LOGISTICS - 0.3%
3,263 United Parcel Service, Inc., Class B....................................................... 350,642
--------------
AIRLINES - 1.8%
7,962 American Airlines Group, Inc............................................................... 339,340
29,773 Southwest Airlines Co. (a)................................................................. 1,673,838
--------------
2,013,178
--------------
AUTO COMPONENTS - 3.3%
3,110 Cooper-Standard Holdings, Inc (b).......................................................... 351,648
15,992 Delphi Automotive PLC...................................................................... 1,285,757
46,439 Gentex Corp................................................................................ 958,965
27,621 Goodyear Tire & Rubber (The) Co............................................................ 1,000,709
--------------
3,597,079
--------------
BANKS - 1.1%
39,712 People's United Financial, Inc............................................................. 693,769
12,245 ServisFirst Bancshares, Inc................................................................ 462,861
--------------
1,156,630
--------------
BIOTECHNOLOGY - 3.0%
3,710 Biogen, Inc. (a) (b)....................................................................... 1,006,189
19,570 Esperion Therapeutics, Inc. (b)............................................................ 699,628
24,935 NewLink Genetics Corp. (b)................................................................. 466,035
16,090 Portola Pharmaceuticals, Inc. (b).......................................................... 643,439
2,666 Shire PLC, ADR............................................................................. 471,775
--------------
3,287,066
--------------
BUILDING PRODUCTS - 3.1%
28,324 Allegion PLC............................................................................... 2,227,399
23,516 Builders FirstSource, Inc. (b)............................................................. 376,491
5,158 Lennox International, Inc.................................................................. 853,082
--------------
3,456,972
--------------
CHEMICALS - 2.7%
11,765 Dow Chemical (The) Co...................................................................... 738,842
5,570 Sherwin-Williams (The) Co.................................................................. 1,864,168
5,020 Trinseo S.A................................................................................ 333,328
--------------
2,936,338
--------------
COMMERCIAL SERVICES & SUPPLIES - 0.9%
26,168 Rollins, Inc............................................................................... 1,016,103
--------------
COMMUNICATIONS EQUIPMENT - 0.7%
28,363 Sierra Wireless, Inc. (b).................................................................. 717,584
--------------
DIVERSIFIED CONSUMER SERVICES - 0.9%
29,245 Service Corp. International/US............................................................. 942,274
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.5%
23,578 AT&T, Inc.................................................................................. 934,396
67,554 Telefonica S.A., ADR....................................................................... 749,850
--------------
1,684,246
--------------
ELECTRICAL EQUIPMENT - 0.5%
3,255 Rockwell Automation, Inc................................................................... 512,174
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 0.4%
4,882 Universal Display Corp..................................................................... 436,207
--------------
See Notes to Financial Statements Page 7
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
ENERGY EQUIPMENT & SERVICES - 0.3%
7,959 US Silica Holdings, Inc.................................................................... $ 330,298
--------------
FOOD & STAPLES RETAILING - 0.6%
8,290 CVS Health Corp............................................................................ 683,428
--------------
FOOD PRODUCTS - 6.2%
61,705 AdvancePierre Foods Holdings, Inc.......................................................... 2,506,457
12,803 ConAgra Foods, Inc......................................................................... 496,500
19,827 Hershey (The) Co........................................................................... 2,145,281
17,124 McCormick & Co., Inc....................................................................... 1,710,688
--------------
6,858,926
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 4.3%
96,274 Accuray, Inc. (b).......................................................................... 438,047
10,899 Danaher Corp............................................................................... 908,214
23,003 Masimo Corp. (b)........................................................................... 2,363,328
11,957 Medtronic PLC.............................................................................. 993,507
--------------
4,703,096
--------------
HEALTH CARE PROVIDERS & SERVICES - 2.4%
9,393 AMN Healthcare Services, Inc. (b).......................................................... 383,704
12,119 Laboratory Corp of America Holdings (b).................................................... 1,698,478
2,933 UnitedHealth Group, Inc. (a)............................................................... 512,923
--------------
2,595,105
--------------
HOTELS, RESTAURANTS & LEISURE - 0.5%
3,863 McDonald's Corp............................................................................ 540,550
--------------
HOUSEHOLD DURABLES - 3.1%
11,569 Lennar Corp., Class A...................................................................... 584,235
59,985 PulteGroup, Inc............................................................................ 1,359,860
20,083 Tupperware Brands Corp..................................................................... 1,442,160
--------------
3,386,255
--------------
HOUSEHOLD PRODUCTS - 1.5%
14,725 Colgate-Palmolive Co....................................................................... 1,060,789
10,114 Energizer Holdings, Inc.................................................................... 599,052
--------------
1,659,841
--------------
INDUSTRIAL CONGLOMERATES - 1.3%
6,763 Roper Industries, Inc...................................................................... 1,479,068
--------------
INTERNET & DIRECT MARKETING RETAIL - 1.8%
2,129 Amazon.com, Inc. (b)....................................................................... 1,969,304
--------------
INTERNET SOFTWARE & SERVICES - 1.1%
8,366 Facebook, Inc., Class A (b)................................................................ 1,256,991
--------------
IT SERVICES - 3.0%
6,093 Accenture PLC, Class A (a)................................................................. 739,081
6,013 Cognizant Technology Solutions Corp., Class A.............................................. 362,163
24,392 Visa, Inc., Class A........................................................................ 2,225,038
--------------
3,326,282
--------------
LEISURE PRODUCTS - 0.3%
5,760 Brunswick Corp............................................................................. 326,880
--------------
MACHINERY - 2.9%
4,526 Deere & Co................................................................................. 505,147
2,699 Stanley Black & Decker, Inc................................................................ 367,469
36,115 Toro (The) Co. (a)......................................................................... 2,344,585
--------------
3,217,201
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
MEDIA - 1.4%
21,110 Liberty Global PLC, Class A (b)............................................................ $ 747,716
21,421 Liberty Global PLC, Class C (b)............................................................ 741,381
--------------
1,489,097
--------------
OIL, GAS & CONSUMABLE FUELS - 1.3%
3,191 Concho Resources, Inc. (b)................................................................. 404,172
8,836 Exxon Mobil Corp. (a)...................................................................... 721,460
1,878 Pioneer Natural Resources Co............................................................... 324,875
--------------
1,450,507
--------------
PHARMACEUTICALS - 3.6%
2,566 Allergan PLC............................................................................... 625,745
14,112 Catalent, Inc. (b)......................................................................... 413,199
32,979 Merck & Co., Inc. (a)...................................................................... 2,055,581
8,303 Mylan NV (b)............................................................................... 310,117
15,097 Novo Nordisk A/S, ADR...................................................................... 583,952
--------------
3,988,594
--------------
PROFESSIONAL SERVICES - 0.3%
3,937 Insperity, Inc............................................................................. 359,645
--------------
ROAD & RAIL - 0.3%
3,255 Union Pacific Corp. (a).................................................................... 364,430
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.9%
12,116 Maxim Integrated Products, Inc............................................................. 534,921
15,531 MaxLinear, Inc. (b)........................................................................ 432,228
--------------
967,149
--------------
SOFTWARE - 6.1%
18,186 Adobe Systems, Inc. (a) (b)................................................................ 2,432,196
4,695 Electronic Arts, Inc. (b).................................................................. 445,180
18,986 Fortinet, Inc. (b)......................................................................... 740,454
11,667 Oracle Corp................................................................................ 524,548
5,233 SAP SE, ADR................................................................................ 524,242
15,826 Symantec Corp.............................................................................. 500,576
6,931 Synopsys, Inc. (b)......................................................................... 510,815
12,059 Workday, Inc., Class A (b)................................................................. 1,053,956
--------------
6,731,967
--------------
SPECIALTY RETAIL - 1.3%
6,727 Home Depot (The), Inc. (a)................................................................. 1,050,085
4,247 Lowe's Cos., Inc........................................................................... 360,485
--------------
1,410,570
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 4.0%
25,348 Apple, Inc. (a)............................................................................ 3,641,240
37,372 HP, Inc. (a)............................................................................... 703,341
--------------
4,344,581
--------------
TEXTILES, APPAREL & LUXURY GOODS - 0.5%
29,879 Kate Spade & Co. (b)....................................................................... 519,895
--------------
TOBACCO - 1.7%
12,946 Altria Group, Inc. (a)..................................................................... 929,264
8,961 Philip Morris International, Inc........................................................... 993,237
--------------
1,922,501
--------------
See Notes to Financial Statements Page 9
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
TRADING COMPANIES & DISTRIBUTORS - 1.6%
19,727 Fastenal Co................................................................................ $ 881,402
3,414 MSC Industrial Direct Co., Inc., Class A................................................... 305,656
5,177 United Rentals, Inc. (b)................................................................... 567,710
--------------
1,754,768
--------------
TRANSPORTATION INFRASTRUCTURE - 0.4%
5,773 Macquarie Infrastructure Corp.............................................................. 469,749
--------------
WIRELESS TELECOMMUNICATION SERVICES - 1.9%
80,025 Vodafone Group PLC, ADR.................................................................... 2,095,855
--------------
TOTAL COMMON STOCKS........................................................................ 85,050,914
(Cost $81,574,106) --------------
REAL ESTATE INVESTMENT TRUSTS - 9.8%
EQUITY REAL ESTATE INVESTMENT TRUSTS - 7.8%
78,751 Columbia Property Trust, Inc............................................................... 1,771,897
33,501 Corporate Office Properties Trust.......................................................... 1,096,823
14,290 Equity Commonwealth (b).................................................................... 457,137
28,575 Equity LifeStyle Properties, Inc. (a)...................................................... 2,312,003
48,123 Four Corners Property Trust, Inc........................................................... 1,122,710
17,038 GEO Group, Inc./The........................................................................ 567,706
14,719 Hospitality Properties Trust (a)........................................................... 468,506
2,975 SBA Communications Corp. (b)............................................................... 376,308
5,764 Ventas, Inc................................................................................ 368,954
--------------
8,542,044
--------------
MORTGAGE REAL ESTATE INVESTMENT TRUSTS - 2.0%
184,503 Annaly Capital Management, Inc............................................................. 2,178,980
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS........................................................ 10,721,024
(Cost $10,107,653) --------------
MASTER LIMITED PARTNERSHIPS - 5.1%
OIL, GAS & CONSUMABLE FUELS - 5.1%
49,941 CVR Refining, L.P. (b)..................................................................... 501,907
66,437 Enterprise Products Partners, L.P. (a)..................................................... 1,815,059
22,489 Shell Midstream Partners, L.P.............................................................. 720,323
36,783 TC Pipelines, L.P.......................................................................... 2,226,475
14,068 Western Refining Logistics, L.P............................................................ 357,327
--------------
TOTAL MASTER LIMITED PARTNERSHIPS.......................................................... 5,621,091
(Cost $5,680,042) --------------
EXCHANGE-TRADED FUNDS - 8.0%
CAPITAL MARKETS - 8.0%
25,266 iShares Core S&P Small-Cap ETF (a)......................................................... 1,763,314
12,698 iShares Russell 2000 ETF (a)............................................................... 1,765,784
10,856 iShares Russell 2000 Growth ETF (a)........................................................ 1,788,091
14,728 iShares Russell 2000 Value ETF (a)......................................................... 1,746,741
13,081 Vanguard Small-Cap ETF (a)................................................................. 1,758,348
--------------
TOTAL EXCHANGE-TRADED FUNDS................................................................ 8,822,278
(Cost $7,260,543) --------------
TOTAL INVESTMENTS - 100.2%................................................................. 110,215,307
(Cost $104,622,344) (c) --------------
Page 10 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS SOLD SHORT - (18.0%)
AEROSPACE & DEFENSE - (1.1%)
(9,087) Aerovironment, Inc. (b).................................................................... $ (259,616)
(8,790) Cubic Corp................................................................................. (456,201)
(3,602) Triumph Group, Inc......................................................................... (94,372)
(794) United Technologies Corp................................................................... (94,478)
(23,240) Wesco Aircraft Holdings, Inc. (b).......................................................... (282,366)
--------------
(1,187,033)
--------------
AIR FREIGHT & LOGISTICS - (0.1%)
(6,078) Echo Global Logistics, Inc. (b)............................................................ (113,963)
--------------
AUTOMOBILES - (0.4%)
(35,760) Ford Motor Co.............................................................................. (410,167)
--------------
BEVERAGES - (0.4%)
(10,575) Coca-Cola (The) Co......................................................................... (456,311)
--------------
BIOTECHNOLOGY - (0.7%)
(6,371) Acceleron Pharma, Inc. (b)................................................................. (210,370)
(2,639) Agios Pharmaceuticals, Inc. (b)............................................................ (131,185)
(1,736) Alnylam Pharmaceuticals, Inc. (b).......................................................... (93,050)
(3,762) Coherus Biosciences, Inc. (b).............................................................. (72,230)
(6,691) Halozyme Therapeutics, Inc. (b)............................................................ (93,273)
(13,514) Inovio Pharmaceuticals, Inc. (b)........................................................... (85,003)
(5,431) Insmed, Inc. (b)........................................................................... (100,202)
--------------
(785,313)
--------------
BUILDING PRODUCTS - (0.7%)
(9,694) Armstrong World Industries, Inc. (b)....................................................... (453,195)
(8,544) Johnson Controls International PLC......................................................... (355,174)
--------------
(808,369)
--------------
CHEMICALS - (1.4%)
(3,213) Air Products & Chemicals, Inc.............................................................. (451,426)
(3,698) Ashland Global Holdings, Inc............................................................... (456,703)
(6,651) Calgon Carbon Corp......................................................................... (96,772)
(3,078) Mosaic (The) Co............................................................................ (82,891)
(3,801) Praxair, Inc............................................................................... (475,049)
--------------
(1,562,841)
--------------
COMMERCIAL SERVICES & SUPPLIES - (0.1%)
(2,015) Clean Harbors, Inc. (b).................................................................... (117,092)
--------------
COMMUNICATIONS EQUIPMENT - (0.5%)
(3,728) Palo Alto Networks, Inc. (b)............................................................... (404,153)
(1,345) ViaSat, Inc. (b)........................................................................... (86,120)
--------------
(490,273)
--------------
CONSTRUCTION & ENGINEERING - (0.1%)
(6,737) KBR, Inc................................................................................... (94,655)
--------------
CONTAINERS & PACKAGING - (0.1%)
(1,822) Bemis Co., Inc............................................................................. (81,862)
--------------
DISTRIBUTORS - (0.3%)
(4,070) Genuine Parts Co........................................................................... (374,521)
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - (0.4%)
(6,435) ATN International, Inc..................................................................... (445,238)
--------------
See Notes to Financial Statements Page 11
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS SOLD SHORT (CONTINUED)
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - (0.4%)
(2,627) FARO Technologies, Inc. (b)................................................................ $ (96,280)
(9,445) National Instruments Corp.................................................................. (329,725)
--------------
(426,005)
--------------
ENERGY EQUIPMENT & SERVICES - (0.5%)
(5,698) Schlumberger, Ltd.......................................................................... (413,618)
(12,181) Superior Energy Services, Inc. (b)......................................................... (147,146)
--------------
(560,764)
--------------
FOOD & STAPLES RETAILING - (0.5%)
(5,826) Wal-Mart Stores, Inc....................................................................... (437,999)
(1,043) Walgreens Boots Alliance, Inc.............................................................. (90,261)
--------------
(528,260)
--------------
FOOD PRODUCTS - (0.4%)
(10,165) Mondelez International, Inc., Class A...................................................... (457,730)
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - (1.4%)
(6,397) Abbott Laboratories........................................................................ (279,165)
(1,234) Analogic Corp.............................................................................. (88,663)
(4,928) AtriCure, Inc. (b)......................................................................... (101,024)
(2,398) Becton, Dickinson & Co..................................................................... (448,354)
(7,673) CONMED Corp................................................................................ (377,205)
(4,615) DENTSPLY SIRONA, Inc....................................................................... (291,852)
--------------
(1,586,263)
--------------
HEALTH CARE TECHNOLOGY - (0.1%)
(3,946) HealthStream, Inc. (b)..................................................................... (109,659)
--------------
INDUSTRIAL CONGLOMERATES - (0.4%)
(14,992) General Electric Co........................................................................ (434,618)
--------------
INTERNET & DIRECT MARKETING RETAIL - (0.6%)
(890) Expedia, Inc............................................................................... (119,011)
(9,936) Liberty Expedia Holdings, Inc., Class A (b)................................................ (480,008)
--------------
(599,019)
--------------
INTERNET SOFTWARE & SERVICES - (0.5%)
(3,486) Benefitfocus, Inc. (b)..................................................................... (109,809)
(6,170) Box, Inc., Class A (b)..................................................................... (106,371)
(9,134) Instructure, Inc. (b)...................................................................... (218,302)
(3,509) New Relic, Inc. (b)........................................................................ (140,290)
--------------
(574,772)
--------------
IT SERVICES - (0.1%)
(1,448) Amdocs, Ltd................................................................................ (88,676)
--------------
LIFE SCIENCES TOOLS & SERVICES - (0.3%)
(6,645) Albany Molecular Research, Inc. (b)........................................................ (106,387)
(1,181) Bio-Rad Laboratories, Inc., Class A (b).................................................... (257,765)
--------------
(364,152)
--------------
MACHINERY - (0.6%)
(12,130) Actuant Corp., Class A..................................................................... (331,149)
(4,000) PACCAR, Inc................................................................................ (266,920)
--------------
(598,069)
--------------
Page 12 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS SOLD SHORT (CONTINUED)
METALS & MINING - (0.4%)
(9,299) Carpenter Technology Corp.................................................................. $ (377,539)
(8,783) Ferroglobe PLC............................................................................. (84,756)
--------------
(462,295)
--------------
OIL, GAS & CONSUMABLE FUELS - (1.9%)
(747) Cimarex Energy Co.......................................................................... (87,160)
(21,312) Gulfport Energy Corp. (b).................................................................. (338,435)
(9,357) Hess Corp.................................................................................. (456,902)
(2,627) Newfield Exploration Co. (b)............................................................... (90,947)
(7,186) Occidental Petroleum Corp.................................................................. (442,226)
(5,806) Phillips 66................................................................................ (461,925)
(7,053) QEP Resources, Inc. (b).................................................................... (83,296)
(12,114) Southwestern Energy Co. (b)................................................................ (90,976)
--------------
(2,051,867)
--------------
PERSONAL PRODUCTS - (0.3%)
(4,384) Edgewell Personal Care Co. (b)............................................................. (313,412)
--------------
PHARMACEUTICALS - (0.4%)
(9,758) Impax Laboratories, Inc. (b)............................................................... (137,100)
(13,504) Nektar Therapeutics (b).................................................................... (256,171)
(2,618) Pfizer, Inc................................................................................ (88,802)
--------------
(482,073)
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - (0.2%)
(4,672) Alexander & Baldwin, Inc................................................................... (214,959)
--------------
SOFTWARE - (1.2%)
(8,517) FireEye, Inc. (b).......................................................................... (106,548)
(3,740) Guidewire Software, Inc. (b)............................................................... (229,973)
(3,911) ServiceNow, Inc. (b)....................................................................... (369,511)
(4,436) Splunk, Inc. (b)........................................................................... (285,279)
(461) Ultimate Software Group, Inc. (b).......................................................... (93,431)
(6,885) Verint Systems, Inc. (b)................................................................... (270,580)
--------------
(1,355,322)
--------------
SPECIALTY RETAIL - (0.3%)
(12,482) Finish Line (The), Inc., Class A........................................................... (197,341)
(10,325) Staples, Inc............................................................................... (100,875)
--------------
(298,216)
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - (0.1%)
(4,803) Stratasys Ltd. (b)......................................................................... (118,922)
--------------
THRIFTS & MORTGAGE FINANCE - (0.2%)
(15,690) New York Community Bancorp, Inc............................................................ (208,520)
--------------
TRADING COMPANIES & DISTRIBUTORS - (0.1%)
(5,787) NOW, Inc. (b).............................................................................. (98,437)
--------------
WIRELESS TELECOMMUNICATION SERVICES - (0.8%)
(17,349) Telephone & Data Systems, Inc.............................................................. (476,403)
(10,633) United States Cellular Corp. (b)........................................................... (416,601)
--------------
(893,004)
--------------
TOTAL COMMON STOCKS SOLD SHORT............................................................. (19,752,652)
(Cost $(19,119,748)) --------------
See Notes to Financial Statements Page 13
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
REAL ESTATE INVESTMENT TRUSTS SOLD SHORT - (2.7%)
EQUITY REAL ESTATE INVESTMENT TRUSTS - (2.7%)
(2,517) UDR, Inc................................................................................... $ (93,985)
(5,351) STORE Capital Corp......................................................................... (128,371)
(971) SL Green Realty Corp....................................................................... (101,887)
(10,378) Retail Properties of America, Inc., Class A................................................ (138,443)
(20,961) Piedmont Office Realty Trust, Inc., Class A................................................ (457,998)
(3,059) Kilroy Realty Corp......................................................................... (215,751)
(4,560) HCP, Inc................................................................................... (142,956)
(7,961) Gramercy Property Trust.................................................................... (221,236)
(9,245) GGP, Inc................................................................................... (199,784)
(3,482) Federal Realty Investment Trust............................................................ (455,759)
(1,427) Essex Property Trust, Inc.................................................................. (348,859)
(15,014) Acadia Realty Trust........................................................................ (436,607)
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS SOLD SHORT............................................. (2,941,636)
(Cost $(2,978,044)) --------------
EXCHANGE-TRADED FUNDS SOLD SHORT - (2.0%)
CAPITAL MARKETS - (2.0%)
(9,404) SPDR S&P 500 ETF Trust..................................................................... (2,238,904)
(Cost $(2,224,968)) --------------
TOTAL INVESTMENTS SOLD SHORT - (22.7%)..................................................... (24,933,192)
(Proceeds $24,322,760) --------------
NET OTHER ASSETS AND LIABILITIES - 22.5%................................................... 24,743,324
--------------
NET ASSETS - 100.0%........................................................................ $ 110,025,439
==============
-----------------------------
(a) All or a portion of this security serves as collateral for the investments
sold short.
(b) Non-income producing security.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $6,857,917 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $1,264,954.
ADR American Depositary Receipt
Page 14 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUTS INPUTS
------------- ------------- -------------- --------------
Common Stocks*..................................... $ 85,050,914 $ 85,050,914 $ -- $ --
Real Estate Investment Trusts*..................... 10,721,024 10,721,024 -- --
Master Limited Partnerships*....................... 5,621,091 5,621,091 -- --
Exchange-Traded Funds*............................. 8,822,28 8,822,28 -- --
------------- ------------- -------------- --------------
Total Investments.................................. $ 110,215,307 $ 110,215,307 $ -- $ --
============= ============= ============== ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2017 PRICES INPUTS INPUTS
------------- ------------- -------------- --------------
Common Stocks Sold Short*.......................... $ (19,752,652) $ (19,752,652) $ -- $ --
Real Estate Investment Trusts Sold Short*.......... (2,941,636) (2,941,636) -- --
Exchange-Traded Funds Sold Short*.................. (2,238,904) (2,238,904) -- --
------------- ------------- -------------- --------------
Total Investments Sold Short ...................... $ (24,933,192) $ (24,933,192) $ -- $ --
============= ============= ============== ==============
* 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 April 30, 2017.
See Notes to Financial Statements Page 15
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value (Cost $ 104,622,344)................................. $ 110,215,307
Cash....................................................................... 8,061,640
Restricted Cash............................................................ 16,696,260
Receivables:
Investment securities sold.............................................. 1,777,490
Dividends............................................................... 70,124
Dividend reclaims....................................................... 2,950
Other assets............................................................... 28,016
--------------
Total Assets............................................................ 136,851,787
--------------
LIABILITIES:
Investments sold short, at value (proceeds $24,322,760).................... 24,933,192
Payables:
Capital shares redeemed................................................. 1,774,121
Investment advisory fees................................................ 87,625
Dividends payable on investments sold short............................. 1,701
Other liabilities.......................................................... 29,709
--------------
Total Liabilities....................................................... 26,826,348
--------------
NET ASSETS................................................................. $ 110,025,439
==============
NET ASSETS CONSIST OF:
Paid-in capital............................................................ $ 106,159,474
Par value.................................................................. 31,000
Accumulated net investment income (loss)................................... 122,283
Accumulated net realized gain (loss) on investments and investments
sold short.............................................................. (1,269,849)
Net unrealized appreciation (depreciation) on investments and investments
sold short.............................................................. 4,982,531
--------------
NET ASSETS................................................................. $ 110,025,439
==============
NET ASSET VALUE, per share................................................. $ 35.49
==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share).............................................. 3,100,002
==============
Page 16 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Dividends.................................................................. $ 1,397,391
Interest................................................................... 9,028
Foreign tax withholding.................................................... (3,082)
--------------
Total investment income................................................. 1,403,337
--------------
EXPENSES:
Investment advisory fees................................................... 575,671
Dividend expense on investments sold short................................. 250,127
Interest expense........................................................... 36,607
--------------
Total expenses.......................................................... 862,405
--------------
NET INVESTMENT INCOME (LOSS)............................................... 540,932
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................. (772,795)
In-kind redemptions..................................................... 11,555,984
Investments sold short.................................................. (1,392,387)
--------------
Net realized gain (loss)................................................... 9,390,802
--------------
Net change in unrealized appreciation (depreciation) on:...................
Investments............................................................. 2,327,758
Investments sold short.................................................. (1,382,921)
--------------
Net change in unrealized appreciation (depreciation)....................... 944,837
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS).................................... 10,335,639
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS......................................................... $ 10,876,571
==============
See Notes to Financial Statements Page 17
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2017 ENDED
(UNAUDITED) 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)............................................... $ 540,932 $ 1,031,087
Net realized gain (loss)................................................... 9,390,802 (2,055,036)
Net change in unrealized appreciation (depreciation)....................... 944,837 3,446,835
-------------- --------------
Net increase (decrease) in net assets resulting from operations............ 10,876,571 2,422,886
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................................... (643,920) (859,016)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.................................................. 69,909,773 160,917,356
Cost of shares redeemed.................................................... (90,348,196) (74,857,579)
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions............................................................ (20,438,423) 86,059,777
-------------- --------------
Total increase (decrease) in net assets.................................... (10,205,772) 87,623,647
NET ASSETS:
Beginning of period........................................................ 120,231,211 32,607,564
-------------- --------------
End of period.............................................................. $ 110,025,439 $ 120,231,211
============== ==============
Accumulated net investment income (loss) at end of period.................. $ 122,283 $ 225,271
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period.................................... 3,700,002 1,000,002
Shares sold................................................................ 2,000,000 5,000,000
Shares redeemed............................................................ (2,600,000) (2,300,000)
-------------- --------------
Shares outstanding, end of period.......................................... 3,100,002 3,700,002
============== ==============
Page 18 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED OCTOBER 31, 9/8/2014 (a)
4/30/2017 ------------------------------- THROUGH
(UNAUDITED) 2016 2015 10/31/2014
-------------- -------------- -------------- --------------
Net asset value, beginning of period............ $ 32.49 $ 32.61 $ 30.54 $ 30.00
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.16 0.32 0.19 0.05
Net realized and unrealized gain (loss)......... 3.02 (0.17) 2.12 0.51
---------- ---------- ---------- ----------
Total from investment operations................ 3.18 0.15 2.31 0.56
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.18) (0.27) (0.22) (0.02)
Net realized gain............................... -- -- (0.02) --
---------- ---------- ---------- ----------
Total distributions............................. (0.18) (0.27) (0.24) (0.02)
---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 35.49 $ 32.49 $ 32.61 $ 30.54
========== ========== ========== ==========
TOTAL RETURN (b)................................ 9.78% 0.45% 7.60% 1.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 110,025 $ 120,231 $ 32,608 $ 3,054
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets... 1.42% (c) 1.40% 1.47% 1.17% (c)
Ratio of total expenses to average net assets
excluding dividend expense................... 0.95% (c) 0.95% 0.95% 0.95% (c)
Ratio of net investment income (loss) to average
net assets................................... 0.89% (c) 1.00% 0.39% 1.08% (c)
Portfolio turnover rate (d)..................... 135% 201% 267% 1%
(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.
See Notes to Financial Statements Page 19
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NOTES TO FINANCIAL STATEMENTS
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
January 9, 2008, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of ten funds that are offering shares. This report
covers the First Trust Long/Short Equity ETF (the "Fund"), which trades under
the ticker "FTLS" on the NYSE Arca, Inc. 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 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 shares are
not redeemable securities of the Fund.
The investment objective of the Fund is to seek to provide investors with
long-term total return. The Fund pursues its investment objective by
establishing long and short positions in a portfolio of equity securities. Under
normal circumstances, at least 80% of the Fund's net assets (including
investment borrowings) will be exposed to U.S. exchange-listed equity securities
of U.S. and foreign companies by investing in such securities directly and/or in
U.S. exchange-traded funds ("ETFs") that provide exposure to such securities.
The equity securities held by the Fund may include U.S. exchange-listed equity
securities of foreign issuers, as well as investments in the equity securities
of foreign issuers that are in the form of depositary receipts. There can be no
assurance that the Fund will achieve its investment objective. The Fund may not
be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 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:
Common stocks, master limited partnerships ("MLPs"), real estate
investment trusts ("REITs") 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.
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
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
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.
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 April 30, 2017, 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 REITs may be comprised of
return of capital, capital gains and income. The actual character of the amounts
received during the year are not known until after the REIT's 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.
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.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
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 will pay 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 in the market 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 that 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. The Fund has established an
account with Pershing, LLC for the purpose of borrowing securities that the Fund
intends to sell short. The interest that the Fund pays for borrowing such
securities is presented separately as "Interest expense" on the Statement of
Operations. Restricted cash in the amount of $16,696,260, as shown on the
Statement of Assets and Liabilities, is associated with collateral at the broker
as of April 30, 2017.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly,
or as the Board of Trustees may determine from time to time. Distributions of
net realized capital gains earned by the Fund, if any, will be distributed at
least annually.
Distributions from income and 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 net asset value
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 year ended October 31,
2016 was as follows:
Distributions paid from:
Ordinary income.................................... $ 859,016
As of October 31, 2016, the components of distributable earnings on a tax basis
to the Fund were as follows:
Undistributed ordinary income...................... $ 223,468
Accumulated capital and other losses............... (10,075,389)
Net unrealized appreciation (depreciation)......... 3,454,235
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 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 April 30, 2017,
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.
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 for federal income tax purposes
of $10,075,389.
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
F. EXPENSES
Expenses, other than the investment advisory fee, dividend and interest expenses
on investments sold short 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.
H. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
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, 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, acquired fund fees and expenses, dividend
expenses on investments sold short, 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. First Trust also provides fund reporting services to
the Fund for a flat annual fee in the amount of $9,250, which is covered under
the annual unitary management fee.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
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 six-months ended April 30, 2017, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, investments sold short
and in-kind transactions, for the Fund were $136,280,899 and $138,779,182,
respectively. The cost of purchases to cover short sales and the proceeds of
short sales were $55,157,598 and $53,007,716, respectively.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
For the six-months ended April 30, 2017, the cost of in-kind purchases and
proceeds from in-kind sales for the Fund were $69,246,908 and $86,759,443,
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 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
aggregations) 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 BBH, 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 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 Creation Transaction Fee may increase
or decrease as the Fund's portfolio is adjusted to conform to changes in 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
$550. 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 BBH, 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 $550. 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 February 28, 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 to the Fund through
the date the financial statements were issued, and has determined there were no
subsequent events requiring recognition or disclosure in the financial
statements.
Page 24
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Trust's Forms N-Q
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.
RISK CONSIDERATIONS
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.
AUTHORIZED PARTICIPANT CONCENTRATION RISK. Only an authorized participant (as
defined in the "Frequent Purchases and Redemptions" Section) may engage in
creation or redemption transactions directly with the Fund. The Fund has a
limited number of institutions that act as authorized participants. To the
extent that these institutions exit the business or are unable to proceed with
creation and/or redemption orders with respect to the Fund and no other
authorized participant is able to step forward to create or redeem, in either of
these cases, Fund shares may trade at a discount to the Fund's net asset value
and possibly face delisting.
CYBER SECURITY RISK. As the use of Internet technology has become more prevalent
in the course of business, the Fund has become more susceptible to potential
operational risks through breaches in cyber security. A breach in cyber security
refers to both intentional and unintentional events that may cause the Fund to
lose proprietary information, suffer data corruption or lose operational
capacity. Such events could cause the Fund to incur regulatory penalties,
reputational damage, additional compliance costs associated with corrective
measures and/or financial loss. Cyber security breaches may involve unauthorized
access to the Fund's digital information systems through "hacking" or malicious
software coding, but may also result from outside attacks such as
denial-of-service attacks through efforts to make network services unavailable
to intended users. In addition, cyber security breaches of the Fund's third
party service providers, such as its administrator, transfer agent, custodian or
sub-advisor, as applicable, or issuers in which the Fund invests, can also
subject the Fund to many of the same risks associated with direct cyber security
breaches. The Fund has established risk management systems designed to reduce
the risks associated with cyber security. However, there is no guarantee that
such efforts will succeed, especially because the Fund does not directly control
the cyber security systems of issuers or third party service providers.
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 futures 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.
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.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
ETF RISK. The Fund may invest in the shares of other ETFs, and therefore, the
Fund's investment performance and risks may be related to the investment
performance and risks of the underlying ETFs. In general, as a shareholder in
other ETFs, the Fund bears its ratable share of the underlying ETF's expenses,
and would be subject to duplicative expenses to the extent the Fund invests in
other ETFs.
FINANCIAL COMPANIES RISK. 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.
FLUCTUATION OF NET ASSET VALUE RISK. The net asset value of shares of the Fund
will generally fluctuate with changes in the market value of the Fund's
holdings. The market prices of shares will generally fluctuate in accordance
with changes in net asset value as well as the relative supply of and demand for
shares on Nasdaq. The Fund's investment advisor cannot predict whether shares
will trade below, at or above their net asset value because the shares trade on
Nasdaq at market prices and not at net asset value. Price differences may be
due, in large part, to the fact that supply and demand forces at work in the
secondary trading market for shares will be closely related to, but not
identical to, the same forces influencing the prices of the holdings of the Fund
trading individually or in the aggregate at any point in time. However, given
that shares can only be purchased and redeemed either in-kind or for cash in
Creation Units, and only to and from broker-dealers and large institutional
investors that have entered into participation agreements (unlike shares of
closed-end funds, which frequently trade at appreciable discounts from, and
sometimes at premiums to, their net asset value), the Fund's investment advisor
believes that large discounts or premiums to the net asset value of shares
should not be sustained.
INFORMATION TECHNOLOGY COMPANIES RISK. Information technology companies are
generally subject to the following risks: rapidly changing technologies; short
product life cycles; fierce competition; aggressive pricing and reduced profit
margins; the loss of patent, copyright and trademark protections; cyclical
market patterns; evolving industry standards; and frequent new product
introductions. Information technology companies may be smaller and less
experienced companies, with limited product lines, markets or financial
resources and fewer experienced management or marketing personnel. Information
technology company stocks, especially those which are Internet related, have
experienced extreme price and volume fluctuations that are often unrelated to
their operating performance.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment 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 objective.
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 securities values could decline generally or could
underperform other investments.
MARKET MAKER RISK. If the Fund has lower average daily trading volumes, it may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in the
spread between the Fund's net asset value and the price at which the Fund's
shares are trading on Nasdaq which could result in a decrease in value of the
Fund's shares. In addition, decisions by market makers or authorized
participants to reduce their role or step away from these activities in times of
market stress could inhibit the effectiveness of the arbitrage process in
maintaining the relationship between the underlying values of the Fund's
portfolio securities and the Fund's market price. This reduced effectiveness
could result in Fund shares trading at a discount to net asset value and also in
greater than normal intraday bid-ask spreads for Fund shares.
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.
Page 26
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2017 (UNAUDITED)
NON-U.S. SECURITIES RISK. The Fund holds non-U.S. securities that are either
directly listed on a U.S. securities exchange or in the form of depositary
receipts. 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.
SHORT SALES RISK. The Fund will incur a loss as a result of a short sale if the
price of the security sold short increases in value between the date of the
short sale and the date on which the Fund purchases the security to replace the
borrowed security. In addition, a lender of a security may request, or market
conditions may dictate, that securities sold short be returned to the lender on
short notice, which may result in the Fund having to buy the securities sold
short at an unfavorable price. If this occurs, any anticipated gain to the Fund
may be reduced or eliminated or the short sale may result in a loss. In a rising
stock market, the Fund's short positions may significantly impact the Fund's
overall performance and cause the Fund to underperform traditional long-only
equity funds or to sustain losses, particularly in a sharply rising market. The
use of short sales may also cause the Fund to have higher expenses than other
funds.
TRADING ISSUES RISK. Although the shares of the Fund are listed for trading on
Nasdaq, there can be no assurance that an active trading market for such shares
will develop or be maintained. Trading in shares on Nasdaq may be halted due to
market conditions or for reasons that, in the view of Nasdaq, make trading in
shares inadvisable. In addition, trading in shares on Nasdaq is subject to
trading halts caused by extraordinary market volatility pursuant to Nasdaq
"circuit breaker" rules. Market makers are under no obligation to make a market
in the Fund's shares, and authorized participants are not obligated to submit
purchase or redemption orders for Creation Units. There can be no assurance that
the requirements of Nasdaq necessary to maintain the listing of the Fund will
continue to be met or will remain unchanged. The Fund may have difficulty
maintaining its listing on Nasdaq in the event the Fund's assets are small or
the Fund does not have enough shareholders.
Page 27
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First Trust
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 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 III
--------------------------------------------------------------------------------
First Trust Emerging Markets Local Currency Bond ETF (FEMB)
Semi-Annual Report
For the
Six Months Ended
April 30, 2017
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
SEMI-ANNUAL REPORT
APRIL 30, 2017
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 11
Statement of Operations...................................................... 12
Statements of Changes in Net Assets.......................................... 13
Financial Highlights......................................................... 14
Notes to Financial Statements................................................ 15
Additional Information....................................................... 22
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") or First Trust Global Portfolios Ltd. (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 III (the "Trust") described in
this report for the First Trust Emerging Markets Local Currency Bond 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-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 by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 by 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 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 its prospectus, statement of additional
information, this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2017
Dear Shareholders:
Thank you for your investment in First Trust Emerging Markets Local Currency
Bond ETF (the "Fund").
The year 2016 was a historic year all over the world. Many will remember some of
the events that occurred during the year: from the Brexit vote in the UK to
leave the European Union, to the results of the U.S. Presidential Election which
seemed unlikely at the beginning of 2016, to the first World Series Championship
for the Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment.
Additionally, First Trust has compiled the Fund's financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
On November 8, 2016, Donald J. Trump was elected to become the 45th president in
our country's history. As I write this, he has just hit his 100th day in office,
always a historic marker for pundits, politicians, and voters. While no one has
a crystal ball and the ability to predict how the Trump administration will
shape the United States (and the world), there is no doubt that his populist
message resonated for many Americans. His message of improving lives for the
"average" American, while reducing the size and scope of the federal government,
also won him millions of votes. Many of his supporters believe that with his
background in business, Trump will make policy changes that will continue to
grow the economy and spur stock markets even higher. Many analysts predicted the
Dow Jones Industrial Average would hit a new benchmark, 20,000, in the first
days of the New Year. It took until January 25, 2017, but the Dow finally traded
over 20,000 on that day. On March 1, 2017, the Dow went past 21,000, a new
record. As with all change and a new administration, only time will tell where
our economy and the markets will go.
As of December 31, 2016, the S&P 500(R) Index (the "Index") was up 11.96% for
the year, on a total return basis, as measured by Bloomberg. As of April 30,
2017, the Index was up 7.16% (calendar year-to-date). The current bull market
(measuring from March 9, 2009 through April 28, 2017) is the second longest in
history, but lags the longest bull market by 4.17 years, according to Bespoke
Investment Group. We remain bullish on the economy, but continue to have a
long-term perspective. We believe investors should think long-term as well,
since no one can predict volatility and the inevitable ups and downs that occur
in the market.
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 our relentless focus
on bringing the types of investments that we believe could help 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 EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
First Trust Emerging Markets Local Currency Bond ETF (the "Fund") seeks maximum
total return and current income. The Fund lists and principally trades its
shares on The Nasdaq Stock Market LLC ("Nasdaq") under the ticker symbol "FEMB."
Under normal market conditions, the Fund seeks to achieve its investment
objective by investing at least 80% of its net assets (including investment
borrowings) in bonds, notes and bills issued or guaranteed by entities in
emerging market countries (collectively, "Bonds") that are denominated in the
local currency of the issuer. In implementing the Fund's investment strategy,
First Trust Global Portfolios Ltd. (the "Sub-Advisor") will seek to provide
current income and enhance capital, while minimizing volatility.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (11/4/14) Inception (11/4/14)
4/30/2017 4/30/2017 to 4/30/2017 to 4/30/2017
FUND PERFORMANCE
NAV 2.09% 3.54% -1.90% -4.65%
Market Price 3.14% 4.80% -1.61% -3.96%
INDEX PERFORMANCE
Barclays Emerging Markets Local Currency
Government - 10% Country Capped Index 1.04% 2.23% -1.63% -4.01%
----------------------------------------------------------------------------------------------------------------------------------
Total returns for the periods since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the periods indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the periods
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
----------------------------------------------------------
Sovereigns 94.6%
Supranationals 4.8
Central Bank 0.6
-------
Total 100.0%
=======
----------------------------------------------------------
% OF TOTAL
INVESTMENTS
CREDIT RATING(1) (INCLUDING CASH)
----------------------------------------------------------
AAA 4.4%
AA 6.3
A+ 2.9
A 11.9
A- 6.6
BBB+ 3.6
BBB 11.3
BBB- 28.9
BB 14.7
Cash 9.4
-------
Total 100.0%
=======
----------------------------------------------------------
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
----------------------------------------------------------
Brazil Notas do Tesouro Nacional,
Series F, 10.00%, 1/1/21 8.1%
Indonesia Treasury Bond, 8.38%, 3/15/24 6.8
Brazil Notas do Tesouro Nacional,
Series F, 10.00%, 1/1/25 6.4
Romania Government Bond, 5.85%, 4/26/23 5.5
Republic of South Africa Government Bond,
10.50%, 12/21/26 5.5
Romania Government Bond, 5.95%, 6/11/21 4.6
Indonesia Treasury Bond, 8.38%, 9/15/26 4.2
Colombian TES, 7.00%, 5/4/22 4.0
Malaysia Government Bond, 4.16%, 7/15/21 3.7
Thailand Government Bond, 3.63%, 6/16/23 3.6
-------
Total 52.4%
=======
(1) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations ("NRSROs"), including Standard & Poor's Ratings Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 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 EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 4, 2014 - APRIL 30, 2017
First Trust Barclays Emerging
Emerging Markets Markets Local Currency
Local Currency Government - 10%
Bond ETF Country Capped Index
11/4/14 $10,000 $10,000
4/30/15 9,340 9,450
10/31/15 8,517 8,634
4/30/16 9,209 9,390
10/31/16 9,340 9,501
4/30/17 9,535 9,600
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 APRIL 30, 2017
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 April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/5/14 - 10/31/15 116 110 7 1
11/1/15 - 10/31/16 80 64 38 3
11/1/16 - 4/30/17 47 39 11 2
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/5/14 - 10/31/15 15 0 0 1
11/1/15 - 10/31/16 60 7 0 0
11/1/16 - 4/30/17 19 5 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
SEMI-ANNUAL REPORT
APRIL 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor which
offers customized portfolio management using its structured, quantitative
approach to security selection. As of April 30, 2017, First Trust managed or
supervised $105.333 billion in assets.
SUB-ADVISOR
First Trust Global Portfolios Ltd. ("FTGP"), an affiliate of First Trust, serves
as investment sub-advisor to the Fund. FTGP is headed by Derek Fulton, Director,
Chief Executive Officer and Chief Investment Officer of FTGP. Mr. Fulton has
been managing global portfolios with a focus on fixed income for over 15 years.
Prior to joining FTGP in 2011, he co-founded Consilience Sarl (formerly ISIS
Asset Management) ("Consilience") and led its investment team. Before starting
Consilience, he was Head of Global & Closed-End Fixed Income Portfolios at
Aberdeen Asset Management ("Aberdeen") in London and also held positions as Head
of Asian Fixed Income based in Singapore. At Aberdeen, Mr. Fulton oversaw in
excess of $10 billion of assets including institutional global government and
global aggregate accounts. He was also a member of the currency team running
active currency overlays on over $20 billion of institutional mandates.
PORTFOLIO MANAGEMENT TEAM
The following portfolio managers are primarily responsible for the day-to-day
management of the Fund. Each portfolio manager has managed the Fund since 2014.
DEREK FULTON, CHIEF EXECUTIVE OFFICER, FTGP
LEONARDO DA COSTA, PORTFOLIO MANAGER, FTGP
Page 5
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2017 (UNAUDITED)
As a shareholder of First Trust Emerging Markets Local Currency Bond 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 April 30, 2017.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2016 APRIL 30, 2017 PERIOD PERIOD (a)
-------------------------------------------------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
Actual $1,000.00 $1,020.90 0.85% $4.26
Hypothetical (5% return before expenses) $1,000.00 $1,020.58 0.85% $4.26
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (November 1,
2016 through April 30, 2017), multiplied by 181/365.
Page 6
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
FOREIGN SOVEREIGN BONDS AND NOTES - 88.9%
BRAZIL - 15.2%
9,100,000 Brazil Notas do Tesouro Nacional, Series F (BRL)................ 10.00% 01/01/21 $ 2,876,222
7,300,000 Brazil Notas do Tesouro Nacional, Series F (BRL)................ 10.00% 01/01/25 2,274,641
1,900,000 Brazil Notas do Tesouro Nacional, Series F (BRL)................ 10.00% 01/01/27 588,917
--------------
5,739,780
--------------
CHILE - 3.6%
120,000,000 Bonos del Banco Central de Chile en Pesos (CLP)................. 6.00% 02/01/21 196,544
740,000,000 Chile Government International Bond (CLP)....................... 5.50% 08/05/20 1,177,516
--------------
1,374,060
--------------
COLOMBIA - 3.7%
3,933,000,000 Colombian TES (COP)............................................. 7.00% 05/04/22 1,410,484
--------------
CZECH REPUBLIC - 2.8%
23,140,000 Czech Republic Government Bond (CZK)............................ 2.40% 09/17/25 1,064,556
--------------
HUNGARY - 3.4%
198,800,000 Hungary Government Bond (HUF)................................... 6.50% 06/24/19 783,293
117,020,000 Hungary Government Bond (HUF)................................... 5.50% 06/24/25 479,674
--------------
1,262,967
--------------
INDONESIA - 12.2%
1,500,000,000 Indonesia Treasury Bond (IDR)................................... 7.88% 04/15/19 115,631
29,714,000,000 Indonesia Treasury Bond (IDR)................................... 8.38% 03/15/24 2,398,486
18,115,000,000 Indonesia Treasury Bond (IDR)................................... 8.38% 09/15/26 1,480,703
7,930,000,000 Indonesia Treasury Bond (IDR)................................... 8.38% 03/15/34 632,425
--------------
4,627,245
--------------
ISRAEL - 3.0%
3,050,000 Israel Government Bond - Fixed (ILS)............................ 6.25% 10/30/26 1,145,749
--------------
MALAYSIA - 4.0%
5,520,000 Malaysia Government Bond (MYR).................................. 4.16% 07/15/21 1,294,500
1,000,000 Malaysia Government Bond (MYR).................................. 4.05% 09/30/21 233,132
--------------
1,527,632
--------------
MEXICO - 4.5%
19,230,000 Mexican Bonos (MXN)............................................. 10.00% 12/05/24 1,193,194
9,290,000 Mexican Bonos (MXN)............................................. 7.75% 05/29/31 507,047
--------------
1,700,241
--------------
PERU - 3.4%
2,795,000 Peru Government Bond (PEN)...................................... 7.84% 08/12/20 952,234
900,000 Peru Government Bond (PEN)...................................... 8.20% 08/12/26 329,204
--------------
1,281,438
--------------
PHILIPPINES - 2.1%
28,000,000 Philippine Government International Bond (PHP).................. 4.95% 01/15/21 577,204
10,000,000 Philippine Government International Bond (PHP).................. 3.90% 11/26/22 196,237
--------------
773,441
--------------
POLAND - 3.7%
600,000 Republic of Poland Government Bond (PLN)........................ 5.50% 10/25/19 167,221
3,832,000 Republic of Poland Government Bond (PLN)........................ 4.00% 10/25/23 1,042,806
615,000 Republic of Poland Government Bond (PLN)........................ 5.75% 04/25/29 195,087
--------------
1,405,114
--------------
See Notes to Financial Statements Page 7
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ---------------------------------------------------------------- ------------- ------------ --------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
ROMANIA - 9.5%
6,020,000 Romania Government Bond (RON)................................... 5.95% 06/11/21 $ 1,632,479
7,130,000 Romania Government Bond (RON)................................... 5.85% 04/26/23 1,959,182
--------------
3,591,661
--------------
SOUTH AFRICA - 9.6%
14,850,000 Republic of South Africa Government Bond (ZAR).................. 7.25% 01/15/20 1,105,119
23,275,000 Republic of South Africa Government Bond (ZAR).................. 10.50% 12/21/26 1,945,692
10,780,000 Republic of South Africa Government Bond (ZAR).................. 6.25% 03/31/36 583,848
--------------
3,634,659
--------------
THAILAND - 3.4%
40,950,000 Thailand Government Bond (THB).................................. 3.63% 06/16/23 1,268,846
--------------
TURKEY - 4.8%
4,410,000 Turkey Government Bond (TRY).................................... 10.50% 01/15/20 1,239,088
2,260,000 Turkey Government Bond (TRY).................................... 8.00% 03/12/25 563,736
--------------
1,802,824
--------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES..................................................... 33,610,697
(Cost $33,647,133) --------------
FOREIGN CORPORATE BONDS AND NOTES - 4.5%
SUPRANATIONALS - 4.5%
630,000 International Finance Corp. (BRL)............................... 10.00% 06/12/17 198,584
600,000 International Finance Corp. (BRL)............................... 10.50% 04/17/18 193,844
37,800,000 International Finance Corp. (INR)............................... 7.80% 06/03/19 606,790
4,730,000 European Investment Bank (ZAR).................................. 6.00% 10/21/19 341,625
23,700,000 International Finance Corp. (INR)............................... 6.30% 11/25/24 369,303
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES...................................................... 1,710,146
(Cost $1,726,188) --------------
TOTAL INVESTMENTS (a) - 93.4%................................................................ 35,320,843
(Cost $35,373,321)
NET OTHER ASSETS AND LIABILITIES - 6.6%...................................................... 2,497,956
--------------
NET ASSETS - 100.0%.......................................................................... $ 37,818,799
==============
-----------------------------
(a) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $651,389 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $703,867.
Page 8 See Notes to Financial Statements
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
Currency Abbreviations:
BRL Brazilian Real
CLP Chilean Peso
COP Colombian Peso
CZK Czech Republic Koruna
HUF Hungarian Forint
IDR Indonesian Rupiah
INR Indian Rupee
ILS Israel Shekel
KRW South Korean Won
MXN Mexican Peso
MYR Malaysian Ringgit
PEN Peruvian New Sol
PHP Philippines Peso
PLN Polish Zloty
RON Romanian Lev
RUB Russian Ruble
THB Thailand Baht
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 April 30,
2017 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
4/30/2017 PRICES INPUTS INPUTS
------------- ------------- -------------- --------------
Foreign Sovereign Bonds and Notes*................. $ 33,610,697 $ -- $ 33,610,697 $ --
Foreign Corporate Bonds and Notes*................. 1,710,146 -- 1,710,146 --
------------- ------------- -------------- --------------
Total Investments.................................. 35,320,843 -- 35,320,843 --
Other Financial Instruments:
Forward Foreign Currency Contracts**............... 27,634 -- 27,634 --
------------- ------------- -------------- --------------
Total.............................................. $ 35,348,477 $ -- $ 35,348,477 $ --
============= ============= ============== ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2017 PRICES INPUTS INPUTS
------------- ------------- -------------- --------------
Forward Foreign Currency Contracts**............... $ (134,171) $ -- $ (134,171) $ --
============= ============= ============== ==============
* See the Portfolio of Investments for country breakout.
** See the Schedule 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 April 30, 2017.
See Notes to Financial Statements Page 9
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
--------------------------------------------
% OF TOTAL
CURRENCY EXPOSURE INVESTMENTS
DIVERSIFICATION (INCLUDING CASH)+
--------------------------------------------
BRL 15.8%
RUB 12.7
IDR 11.9
INR 11.3
ZAR 10.2
MXN 8.5
TRY 5.9
PEN 5.9
MYR 5.6
COP 4.9
CLP 3.5
ILS 3.4
THB 3.3
CZK 2.7
PHP 2.0
PLN 2.0
HUF 1.6
KRW 0.9
RON 0.3
USD -12.4
-------
Total 100.0%
=======
+ The weightings include the impact of currency forwards.
Forward Foreign Currency Contracts (see Note 2C - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (a) SOLD (a) APRIL 30, 2017 APRIL 30, 2017 (DEPRECIATION)
-------------- -------------- ----------------- --------------- ----------------- ---------------- --------------
05/24/17 BNS COP 1,500,000,000 USD 525,394 $ 507,916 $ 525,394 $ (17,478)
05/24/17 BNS INR 220,000,000 USD 3,397,580 3,408,162 3,397,580 10,582
05/24/17 BNS KRW 410,000,000 USD 360,915 360,404 360,915 (511)
05/24/17 BBH MXN 30,370,000 USD 1,608,617 1,606,702 1,608,617 (1,915)
05/24/17 BNS PEN 3,300,000 USD 1,011,587 1,014,396 1,011,587 2,809
05/24/17 BNS RUB 281,500,000 USD 4,975,696 4,918,913 4,975,696 (56,783)
05/24/17 BBH TRY 1,820,000 USD 494,845 509,088 494,845 14,243
05/24/17 BBH USD 641,919 HUF 187,000,000 641,919 650,889 (8,970)
05/24/17 BBH USD 629,775 PLN 2,500,000 629,775 644,278 (14,503)
05/24/17 BBH USD 3,561,610 RON 11,498,664 3,561,610 3,595,621 (34,011)
--------------
Net Unrealized Appreciation (Depreciation).................................................................... $ (106,537)
==============
(a) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
BBH Brown Brothers Harriman & Co.
BNS Bank of Nova Scotia
Page 10 See Notes to Financial Statements
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 35,320,843
Cash................................................................... 2,720,951
Foreign currency....................................................... 944,999
Unrealized appreciation on forward foreign currency contracts.......... 27,634
Interest receivable.................................................... 841,588
--------------
Total Assets........................................................ 39,856,015
--------------
LIABILITIES:
Unrealized depreciation on forward foreign currency contracts.......... 134,171
Payables:
Investment securities purchased..................................... 1,863,557
Investment advisory fees............................................ 22,706
Deferred Indonesian capital gains tax............................... 16,782
--------------
Total Liabilities................................................... 2,037,216
--------------
NET ASSETS............................................................. $ 37,818,799
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 38,050,118
Par value.............................................................. 9,000
Accumulated net investment income (loss)............................... (183,964)
Accumulated net realized gain (loss) on investments, forward foreign
currency contracts and foreign currency transactions................ 112,106
Net unrealized appreciation (depreciation) on investments, forward
foreign currency contracts and foreign currency translation......... (168,461)
--------------
NET ASSETS............................................................. $ 37,818,799
==============
NET ASSET VALUE, per share............................................. $ 42.02
==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share).......................................... 900,002
==============
Investments, at cost................................................... $ 35,373,321
==============
Foreign currency, at cost (proceeds)................................... $ 944,936
==============
See Notes to Financial Statements Page 11
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Interest............................................................... $ 628,576
Foreign tax withholding................................................ (20,079)
--------------
Total investment income............................................. 608,497
--------------
EXPENSES:
Investment advisory fees............................................... 92,493
--------------
Total expenses...................................................... 92,493
--------------
NET INVESTMENT INCOME (LOSS)........................................... 516,004
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... (147,300)
Forward foreign currency contracts.................................. 412,917
Foreign currency transactions....................................... (63,649)
--------------
Net realized gain (loss)............................................... 201,968
--------------
Net change in unrealized appreciation (depreciation) on:
Investments......................................................... 352,886
Forward foreign currency contracts.................................. (93,785)
Foreign currency translation........................................ 5,936
Net change in deferred capital gains tax............................ (14,122)
--------------
Net change in unrealized appreciation (depreciation)................... 250,915
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 452,883
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 968,887
==============
Page 12 See Notes to Financial Statements
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2017 ENDED
(UNAUDITED) 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 516,004 $ 259,919
Net realized gain (loss)............................................... 201,968 (121,079)
Net change in unrealized appreciation (depreciation)................... 250,915 218,256
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 968,887 357,096
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (622,782) (208,381)
Return of capital...................................................... -- (95,214)
-------------- --------------
Total distributions to shareholders.................................... (622,782) (303,595)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 22,660,634 10,681,117
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions........................................................ 22,660,634 10,681,117
-------------- --------------
Total increase (decrease) in net assets................................ 23,006,739 10,734,618
NET ASSETS:
Beginning of period.................................................... 14,812,060 4,077,442
-------------- --------------
End of period.......................................................... $ 37,818,799 $ 14,812,060
============== ==============
Accumulated net investment income (loss) at end of period.............. $ (183,964) $ (77,186)
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 350,002 100,002
Shares sold............................................................ 550,000 250,000
-------------- --------------
Shares outstanding, end of period...................................... 900,002 350,002
============== ==============
See Notes to Financial Statements Page 13
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE
SIX MONTHS FOR THE PERIOD
ENDED YEAR 11/4/2014 (a)
4/30/2017 ENDED THROUGH
(UNAUDITED) 10/31/2016 10/31/2015
-------------- -------------- --------------
Net asset value, beginning of period $ 42.32 $ 40.77 $ 50.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 1.15 1.74 1.94
Net realized and unrealized gain (loss) (0.32) 2.09 (9.23)
---------- ---------- ----------
Total from investment operations 0.83 3.83 (7.29)
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (1.13) (1.56) --
Return of capital -- (0.72) (1.94)
---------- ---------- ----------
Total distributions (1.13) (2.28) (1.94)
---------- ---------- ----------
Net asset value, end of period $ 42.02 $ 42.32 $ 40.77
========== ========== ==========
TOTAL RETURN (b) 2.09% 9.66% (14.83)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 37,819 $ 14,812 $ 4,077
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.85% (c) 0.85% 0.85% (c)
Ratio of net investment income (loss) to
average net assets 4.74% (c) 4.70% 4.36% (c)
Portfolio turnover rate (d) 9% 23% 49%
(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 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on January 9,
2008, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of ten funds that are currently offering shares.
This report covers the First Trust Emerging Markets Local Currency Bond ETF (the
"Fund"), a non-diversified series of the Trust, which trades under the ticker
FEMB 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 issued and redeemed in 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 is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek maximum total return and current income. Under normal
market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its net assets (including investment borrowings) in
bonds, notes and bills issued or guaranteed by issuers in emerging market
countries that are denominated in the local currency of the issuer. There can be
no assurance that the Fund will achieve its investment objective. The Fund may
not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 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 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
Fund's 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 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:
Bonds, 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.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
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.
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.
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 issuer, or economic
data relating to the country of issue;
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 security;
4) the financial statements of the issuer, or the financial condition
of the country of issue;
5) the credit quality and cash flow of the issuer, or country of issue,
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 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 governmental
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.
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.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
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 April 30, 2017, 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
on the accrual basis. Amortization of premiums and accretion of discounts are
recorded using the effective interest method.
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. The change in unrealized
appreciation/depreciation is included in "Net change in unrealized appreciation
(depreciation) on forward foreign currency contracts" on the Statement of
Operations. 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, 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. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES
Offsetting assets and liabilities require entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency), for
the non-defaulting Counterparty to liquidate the collateral and calculate the
net exposure to the defaulting party or request additional collateral.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
At April 30, 2017, derivative assets and liabilities (by type) on a gross basis
are as follows:
Gross Amounts not
Offset in the
Statement of Assets
Net Amounts of and Liabilities
Gross Amounts Assets -----------------------
Offset in the Presented in the Collateral
Gross Amounts of Statement of Assets Statement of Assets Financial Amounts
Recognized Assets and Liabilities and Liabilities Instruments Pledged Net Amount
------------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 27,634 $ -- $ 27,634 $ (27,634) $ -- $ --
Gross Amounts not
Offset in the
the Statement of Assets
Net Amounts of and Liabilities
Gross Amounts Liabilities -----------------------
Offset in the Presented in the Collateral
Gross Amounts of Statement of Assets Statement of Assets Financial Amounts
Recognized Liabilities and Liabilities and Liabilities Instruments Received Net Amount
------------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ (134,171) $ -- $ (134,171) $ 27,634 $ -- $ (106,537)
* The respective counterparties for each contract are disclosed on the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
E. 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.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and 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 portfolio
securities held by the Fund and have no impact on net assets or net asset value
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 year ended October 31,
2016 was as follows:
Distributions paid from:
Ordinary income................................................ $ 208,381
Capital gain................................................... --
Return of capital.............................................. 95,214
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
As of October 31, 2016, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income.................................. $ --
Accumulated capital and other losses........................... (88,751)
Net unrealized appreciation (depreciation)..................... (497,673)
G. 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 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 year ended 2015 and
2016 remain open to federal and state audit. As of April 30, 2017, 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.
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 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 for federal income tax purposes
of $88,751.
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.
H. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (See Note 3).
I. 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 are effective for the First Trust funds, including the
Fund, beginning on and after June 1, 2018. Management is evaluating the new and
amended rules and forms to determine the impact to the Fund.
J. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
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.
The Trust, on behalf of the Fund, and First Trust have retained First Trust
Global Portfolios Ltd. ("FTGP" or the "Sub- Advisor"), an affiliate of First
Trust, to serve as investment sub-advisor. In this capacity, FTGP is responsible
for the selection and ongoing monitoring of the securities in the Fund's
investment portfolio. First Trust is paid an annual unitary management fee of
0.85% of the Fund's average daily net assets. FTGP receives a sub-advisory fee
equal to 40% of any remaining monthly unitary fee paid to the Advisor after the
Fund's average expenses accrued during the most recent twelve months are
subtracted from the unitary fee for that month. First Trust is responsible for
the expenses of the Fund including the cost of transfer agency, custody, fund
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
administration, legal, audit and other services, and excluding Rule 12b-1
distribution and service fees, if any, brokerage expenses, taxes, interest,
acquired fund fees and expenses, and extraordinary expenses. First Trust also
provides fund reporting services to the Fund for a flat annual fee in the amount
of $9,250, which is covered under the annual unitary management fee.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
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 six months ended April 30, 2017, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
for the Fund were $23,493,034 and $1,839,576, respectively.
For the six months ended April 30, 2017, the Fund had no in-kind transactions.
5. DERIVATIVE TRANSACTIONS
The following table presents the type of derivative held by the Fund at April
30, 2017, the primary underlying risk exposure and location of these instruments
as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------------ ------------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ ------------- ------------------------ ---------------- ------------------------ ----------------
Unrealized appreciation Unrealized depreciation
Forward foreign on forward foreign on forward foreign
currency contracts Currency Risk currency contracts $ 27,634 currency contracts $ 134,171
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2017, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
CURRENCY RISK
Net realized gain (loss) on forward foreign currency contracts $ 412,917
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts (93,785)
During the six months ended April 30, 2017, the notional values of forward
foreign currency contracts opened and closed were $95,459,462 and $81,121,106,
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 and
other instruments 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
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
(per Creation Unit aggregations) 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 BBH, 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 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 Creation Transaction Fee
may increase or decrease as the Fund's portfolio is adjusted to conform to
changes in the composition of the securities included in the Fund's portfolio
and the countries in which the transaction 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 BBH, 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. LINE OF CREDIT
The Trust, First Trust Series Fund and First Trust Exchange-Traded Fund IV
entered into a $220 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,
2017, the commitment was $180 million. Prior to December 16, 2016, the
commitment amount was $140 million. 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 six months ended April
30, 2017.
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 ("FTP"), the distributor of the Fund,
for amounts expended to finance activities primarily intended to result in the
sale of Creation Units or to provide investor services. FTP may also use this
amount to compensate securities dealers or other persons that are Authorized
Participants for providing distribution assistance, including broker-dealer and
shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before February 28, 2018.
9. 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.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there were
the following subsequent events:
On May 22, 2017, the Fund declared a distribution of $0.21 per share to
shareholders of record on May 25, 2017, payable May 31, 2017.
Page 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 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 located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of 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.
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 III.
The following summarizes some of the risks that should be considered for the
Fund.
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 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.
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 EXCHANGE RATE RISK. The Fund holds 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.
CURRENCY RISK. Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in non-U.S. dollar-denominated 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 may hedge certain of its non-U.S. dollar holdings.
DERIVATIVES RISK. The use of options, futures contracts, forward contracts and
other 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 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.
EMERGING MARKETS RISK. Investments in securities and instruments traded in
developing or emerging markets or that provide exposure to such securities or
markets, can involve additional risks relating to political, economic, or
regulatory conditions not associated with investments in U.S. securities and
instruments or investments in more developed international markets. Emerging
market governments may, without prior warning, impose capital controls on the
ability to transfer currency, securities or other assets. The Fund's ability to
access certain developing or emerging markets also may be limited due to a
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
variety of factors, including currency convertibility issues. Such conditions
may impact the ability of the Fund to buy, sell or otherwise transfer
securities, cause the Fund's returns to differ from those available to domestic
investors, adversely affect the trading market and price for Fund shares, and
cause the Fund to decline in value.
GLOBAL DEPOSITARY NOTES RISK. Any distributions paid to the holders of GDNs are
usually subject to a fee charged by the depositary bank. Holders of GDNs may
have limited rights, and investment restrictions in certain countries may
adversely impact the value of GDNs because such restrictions may limit the
ability to convert the Bonds into GDNs and vice versa.
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, are considered to be highly speculative. These
securities are issued by issuers that may have narrowly focused operations
and/or other impediments to the timely payment of periodic interest and
principal at maturity. If the global or local 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 will decline because of rising market interest
rates. Interest rate risk is generally lower for shorter term investments and
higher for longer term investments.
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
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 objective.
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 bond
prices. Also, certain of these factors may affect the liquidity of the Bonds in
the Fund's portfolio and make it more difficult for the Fund to sell them.
Overall securities 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 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. 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 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2017 (UNAUDITED)
SMALL FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new 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.
SOVEREIGN DEBT RISK. Investments in sovereign bonds 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 availability of sufficient
foreign exchange on the date a payment is due; 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 bonds 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. In times of economic uncertainty, the prices of these
securities may be more volatile than those of corporate debt obligations or of
other government debt obligations.
Page 24
First Trust
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
First Trust Global Portfolios Ltd.
Floor 2
8 Angel Court
London EC2R 7HJ
England
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 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 III
--------------------------------------------------------------------------------
First Trust RiverFront Dynamic Asia Pacific ETF (RFAP)
First Trust RiverFront Dynamic Developed International
ETF (RFDI)
First Trust RiverFront Dynamic Europe ETF (RFEU)
First Trust RiverFront Dynamic Emerging Markets ETF
(RFEM)
Semi-Annual Report
For the Six Months Ended
April 30, 2017
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TABLE OF CONTENTS
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FIRST TRUST EXCHANGE-TRADED FUND III
SEMI-ANNUAL REPORT
APRIL 30, 2017
Shareholder Letter........................................................... 2
Fund Performance Overview
First Trust RiverFront Dynamic Asia Pacific ETF (RFAP).................... 3
First Trust RiverFront Dynamic Developed International ETF (RFDI)......... 5
First Trust RiverFront Dynamic Europe ETF (RFEU).......................... 7
First Trust RiverFront Dynamic Emerging Markets ETF (RFEM)................ 9
Notes to Fund Performance Overview........................................... 11
Portfolio Management......................................................... 12
Understanding Your Fund Expenses............................................. 13
Portfolio of Investments
First Trust RiverFront Dynamic Asia Pacific ETF (RFAP).................... 14
First Trust RiverFront Dynamic Developed International ETF (RFDI)......... 16
First Trust RiverFront Dynamic Europe ETF (RFEU).......................... 20
First Trust RiverFront Dynamic Emerging Markets ETF (RFEM)................ 22
Statements of Assets and Liabilities......................................... 25
Statements of Operations..................................................... 26
Statements of Changes in Net Assets.......................................... 27
Financial Highlights......................................................... 29
Notes to Financial Statements................................................ 33
Additional Information....................................................... 40
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and RiverFront Investment Group, LLC ("RiverFront" 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
any series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report (each such series is referred to as a "Fund" and collectively, the
"Funds") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and/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 any Fund described in this report will achieve its
investment objective. Each Fund is subject to market risk, which is the
possibility that the market values of securities owned by the Fund will decline
and that the value of the Fund shares may therefore be less than what you paid
for them. Accordingly, you can lose money by investing in a Fund. See "Risk
Considerations" in the Additional Information section of this report for a
discussion of other risks of investing in the Funds.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 each Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about each Fund's portfolio and presents data and analysis that
provide insight into each Fund's performance and investment approach.
The statistical information that follows may help you understand each Fund's
performance compared to that of relevant market benchmarks.
It is important to keep in mind that 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 each Fund are spelled out in its prospectus, statement of
additional information, this report and other Fund regulatory filings.
Page 1
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SHAREHOLDER LETTER
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FIRST TRUST EXCHANGE-TRADED FUND III
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2017
Dear Shareholders:
Thank you for your investment in First Trust RiverFront Dynamic International
ETFs (the "Funds").
The year 2016 was a historic year all over the world. Many will remember some of
the events that occurred during the year: from the Brexit vote in the UK to
leave the European Union, to the results of the U.S. Presidential Election which
seemed unlikely at the beginning of 2016, to the first World Series Championship
for the Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment.
Additionally, First Trust has compiled the Funds' financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
On November 8, 2016, Donald J. Trump was elected to become the 45th president in
our country's history. As I write this, he has just hit his 100th day in office,
always a historic marker for pundits, politicians, and voters. While no one has
a crystal ball and the ability to predict how the Trump administration will
shape the United States (and the world), there is no doubt that his populist
message resonated for many Americans. His message of improving lives for the
"average" American, while reducing the size and scope of the federal government,
also won him millions of votes. Many of his supporters believe that with his
background in business, Trump will make policy changes that will continue to
grow the economy and spur stock markets even higher. Many analysts predicted the
Dow Jones Industrial Average would hit a new benchmark, 20,000, in the first
days of the New Year. It took until January 25, 2017, but the Dow finally traded
over 20,000 on that day. On March 1, 2017, the Dow went past 21,000, a new
record. As with all change and a new administration, only time will tell where
our economy and the markets will go.
As of December 31, 2016, the S&P 500(R) Index (the "Index") was up 11.96% for
the year, on a total return basis, as measured by Bloomberg. As of April 30,
2017, the Index was up 7.16% (calendar year-to-date). The current bull market
(measuring from March 9, 2009 through April 28, 2017) is the second longest in
history, but lags the longest bull market by 4.17 years, according to Bespoke
Investment Group. We remain bullish on the economy, but continue to have a
long-term perspective. We believe investors should think long-term as well,
since no one can predict volatility and the inevitable ups and downs that occur
in the market.
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 our relentless focus
on bringing the types of investments that we believe could help 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 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP)
The investment objective of First Trust RiverFront Dynamic Asia Pacific ETF (the
"Fund") is to provide capital appreciation. Under normal market conditions, the
Fund will seek to achieve its investment objective by investing at least 80% of
its net assets (including investment borrowings) in a portfolio of equity
securities of Asian Pacific companies, including through investments in common
stock, depositary receipts, and common and preferred shares of real estate
investment trusts ("REITs"), and forward foreign currency exchange contracts and
currency spot transactions used to hedge the Fund's exposure to the currencies
in which the equity securities of such Asian Pacific companies are denominated
(each, an "Asian Pacific currency" and, collectively, the "Asian Pacific
currencies"). Asian Pacific companies are those companies (i) whose securities
are traded principally on a stock exchange in an Asian Pacific country, (ii)
that have a primary business office in an Asian Pacific country, or (iii) that
have at least 50% of their assets in, or derive at least 50% of their revenues
or profits from, an Asian Pacific country. Asian Pacific countries include the
countries located in Asia and the Pacific Islands as well as Australia and New
Zealand. The Fund will generally focus its Asian Pacific company investments in
Australia, Hong Kong, Japan, New Zealand and/or Singapore. Shares of the Fund
are listed on the Nasdaq Stock Exchange LLC under the ticker symbol "RFAP."
The Fund will utilize a dynamic currency hedging strategy through the use of
forward foreign currency exchange contracts and currency spot transactions to
hedge up to 100% of the Fund's currency exposure. As a result of such dynamic
currency hedging strategy, the portion of the Fund's portfolio securities which
are subject to currency hedging transactions may vary widely, from 0% to 100% of
the portfolio securities. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract, at a price set on the date of the contract. A forward foreign currency
exchange contract may reduce the Fund's exposure to changes in the value of the
currency it will deliver and increase its exposure to changes in the value of
the currency it will receive for the duration of the contract. The effect on the
value of the Fund is similar to selling securities denominated in one currency
and purchasing securities denominated in another currency. The Fund also may
enter into currency spot transactions as part of its dynamic currency hedging
strategy. A currency spot transaction is an agreement between two parties to buy
or sell a specific currency for delivery on a date that is typically two
business days from the date of the agreement, as opposed to a date set in the
future. The underlying currencies of the forward foreign currency exchange
contracts and currency spot transactions included in the Fund's policy relating
to the investment of at least 80% of its net assets (including investment
borrowings) will be limited to Asian Pacific currencies.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (4/13/16) Inception (4/13/16)
4/30/17 4/30/17 to 4/30/17 to 4/30/17
FUND PERFORMANCE
NAV 7.07% 8.33% 9.05% 9.49%
Market Price 7.36% 12.41% 9.56% 10.02%
INDEX PERFORMANCE
MSCI Pacific Index 6.55% 12.53% 14.74% 15.48%
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(See Notes to Fund Performance Overview on Page 11.)
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) (CONTINUED)
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Consumer Discretionary 21.3%
Financials 20.8
Industrials 13.9
Information Technology 10.1
Health Care 7.2
Materials 6.1
Consumer Staples 5.3
Utilities 5.2
Telecommunication Services 4.1
Real Estate 3.8
Energy 2.2
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Commonwealth Bank of Australia 3.7%
Westpac Banking Corp. 3.6
Sony Corp. 2.0
Galaxy Entertainment Group Ltd. 1.7
ASM Pacific Technology Ltd. 1.7
Canon, Inc. 1.7
Panasonic Corp. 1.6
SoftBank Group Corp. 1.6
Sumitomo Electric Industries Ltd. 1.5
Bandai Namco Holdings, Inc. 1.5
-------
Total 20.6%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
APRIL 13, 2016 - APRIL 30, 2017
First Trust RiverFront
Dynamic Asia Pacific ETF MSCI Pacific Index
4/13/16 $10,000 $10,000
4/30/16 10,107 10,262
10/31/16 10,226 10,839
4/30/17 10,949 11,549
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 APRIL 30, 2017
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 April 14, 2016 (commencement
of trading) through April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
4/14/16 - 10/31/16 65 29 12 2
11/1/16 - 4/30/17 44 49 22 0
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
4/14/16 - 10/31/16 21 8 2 1
11/1/16 - 4/30/17 8 0 0 0
Page 4
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
The investment objective of First Trust RiverFront Dynamic Developed
International ETF (the "Fund") is to provide capital appreciation. Under normal
market conditions, the Fund will seek to achieve its investment objective by
investing at least 80% of its net assets (including investment borrowings) in a
portfolio of equity securities of developed market companies, including through
investments in common stock, depositary receipts, and common and preferred
shares of real estate investment trusts ("REITs"), and forward foreign currency
exchange contracts and currency spot transactions used to hedge the Fund's
exposure to the currencies in which the equity securities of such developed
market companies are denominated (each, a "Developed Market currency" and,
collectively, the "Developed Market currencies"). Developed market companies are
those companies (i) whose securities are traded principally on a stock exchange
in a developed market country, (ii) that have a primary business office in a
developed market country, or (iii) that have at least 50% of their assets in, or
derive at least 50% of their revenues or profits from, a developed market
country. Developed market countries currently include the countries comprising
the Morgan Stanley Capital International World Index or countries considered to
be developed by the World Bank, the International Finance Corporation or the
United Nations. Under normal market conditions, the Fund will invest in at least
three countries and at least 40% of its net assets in countries other than the
United States. Shares of the Fund are listed on the Nasdaq Stock Exchange LLC
under the ticker symbol "RFDI."
The Fund will utilize a dynamic currency hedging strategy through the use of
forward foreign currency exchange contracts and currency spot transactions to
hedge up to 100% of the Fund's currency exposure. As a result of such dynamic
currency hedging strategy, the portion of the Fund's portfolio securities which
are subject to currency hedging transactions may vary widely, from 0% to 100% of
the portfolio securities. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract, at a price set on the date of the contract. A forward foreign currency
exchange contract may reduce the Fund's exposure to changes in the value of the
currency it will deliver and increase its exposure to changes in the value of
the currency it will receive for the duration of the contract. The effect on the
value of the Fund is similar to selling securities denominated in one currency
and purchasing securities denominated in another currency. The Fund also may
enter into currency spot transactions as part of its dynamic currency hedging
strategy. A currency spot transaction is an agreement between two parties to buy
or sell a specific currency for delivery on a date that is typically two
business days from the date of the agreement, as opposed to a date set in the
future. The underlying currencies of the forward foreign currency exchange
contracts and currency spot transactions included in the Fund's policy relating
to the investment of at least 80% of its net assets (including investment
borrowings) will be limited to Developed Market currencies.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (4/13/16) Inception (4/13/16)
4/30/17 4/30/17 to 4/30/17 to 4/30/17
FUND PERFORMANCE
NAV 14.06% 16.57% 16.30% 17.12%
Market Price 14.37% 16.84% 16.65% 17.49%
INDEX PERFORMANCE
MSCI EAFE Index 11.47% 11.29% 12.70% 13.33%
----------------------------------------------------------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on Page 11.)
Page 5
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) (CONTINUED)
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Financials 20.0%
Consumer Discretionary 14.2
Industrials 14.2
Health Care 11.0
Consumer Staples 9.6
Materials 9.3
Information Technology 7.4
Energy 4.7
Utilities 4.0
Telecommunication Services 3.8
Real Estate 1.8
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
British American Tobacco PLC 1.8%
Banco Santander S.A. 1.5
SAP SE 1.5
Banco Bilbao Vizcaya Argentaria S.A. 1.4
Sonova Holding AG 1.4
Weir Group (The) PLC 1.2
Commonwealth Bank of Australia 1.2
Westpac Banking Corp. 1.1
Nestle S.A. 1.0
TOTAL S.A. 1.0
-------
Total 13.1%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
APRIL 13, 2016 - APRIL 30, 2017
First Trust RiverFront Dynamic
Developed International ETF MSCI EAFE Index
4/13/16 $10,000 $10,000
4/30/16 10,047 10,183
10/31/16 10,267 10,167
4/30/17 11,711 11,333
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 APRIL 30, 2017
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 April 14, 2016 (commencement
of trading) through April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
4/14/16 - 10/31/16 46 70 18 2
11/1/16 - 4/30/17 54 60 6 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
4/14/16 - 10/31/16 4 0 0 0
11/1/16 - 4/30/17 3 0 0 0
Page 6
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU)
The investment objective of First Trust RiverFront Dynamic Europe ETF (the
"Fund") is to provide capital appreciation. Under normal market conditions, the
Fund will seek to achieve its investment objective by investing at least 80% of
its net assets (including investment borrowings) in a portfolio of equity
securities of European companies, including through investments in common stock,
depositary receipts, and common and preferred shares of real estate investment
trusts ("REITs"), and forward foreign currency exchange contracts and currency
spot transactions used to hedge the Fund's exposure to the currencies in which
the equity securities of such European companies are denominated (each, a
"European currency" and, collectively, the "European currencies"). European
companies are those companies (i) whose securities are traded principally on a
stock exchange in a European country, (ii) that have a primary business office
in a European country, or (iii) that have at least 50% of their assets in, or
derive at least 50% of their revenues or profits from, a European country. The
Fund considers a European country to be any member country of the European Union
or any country included in the FTSE Developed Europe Index or the FTSE Emerging
Europe All Cap Index. The Fund will generally focus its European company
investments in Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland
and/or the United Kingdom. Shares of the Fund are listed on the Nasdaq Stock
Exchange LLC under the ticker symbol "RFEU."
The Fund will utilize a dynamic currency hedging strategy through the use of
forward foreign currency exchange contracts and currency spot transactions to
hedge up to 100% of the Fund's currency exposure. As a result of such dynamic
currency hedging strategy, the portion of the Fund's portfolio securities which
are subject to currency hedging transactions may vary widely, from 0% to 100% of
the portfolio securities. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract, at a price set on the date of the contract. A forward foreign currency
exchange contract may reduce the Fund's exposure to changes in the value of the
currency it will deliver and increase its exposure to changes in the value of
the currency it will receive for the duration of the contract. The effect on the
value of the Fund is similar to selling securities denominated in one currency
and purchasing securities denominated in another currency. The Fund also may
enter into currency spot transactions as part of its dynamic currency hedging
strategy. A currency spot transaction is an agreement between two parties to buy
or sell a specific currency for delivery on a date that is typically two
business days from the date of the agreement, as opposed to a date set in the
future. The underlying currencies of the forward foreign currency exchange
contracts and currency spot transactions included in the Fund's policy relating
to the investment of at least 80% of its net assets (including investment
borrowings) will be limited to European currencies.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (4/13/16) Inception (4/13/16)
4/30/17 4/30/17 to 4/30/17 to 4/30/17
FUND PERFORMANCE
NAV 17.79% 20.59% 19.91% 20.92%
Market Price 17.34% 20.28% 20.33% 21.37%
INDEX PERFORMANCE
MSCI Europe Index 14.52% 10.93% 11.91% 12.50%
----------------------------------------------------------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on Page 11.)
Page 7
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) (CONTINUED)
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Financials 19.7%
Industrials 14.3
Health Care 12.7
Consumer Staples 11.6
Consumer Discretionary 11.0
Materials 10.8
Information Technology 6.3
Energy 5.8
Telecommunication Services 3.6
Utilities 3.4
Real Estate 0.8
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
British American Tobacco PLC 2.7%
Banco Santander S.A. 2.2
SAP SE 2.1
Banco Bilbao Vizcaya Argentaria S.A. 2.1
Sonova Holding AG 2.0
Weir Group (The) PLC 1.7
Nestle S.A. 1.5
TOTAL S.A. 1.5
HSBC Holdings PLC 1.5
Fresenius SE & Co., KGaA 1.5
-------
Total 18.8%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
APRIL 13, 2016 - APRIL 30, 2017
First Trust RiverFront
Dynamic Europe ETF MSCI Europe Index
4/13/16 $10,000 $10,000
4/30/16 10,028 10,141
10/31/16 10,267 9,823
4/30/17 12,093 11,249
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 APRIL 30, 2017
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 April 14, 2016 (commencement
of trading) through April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
4/14/16 - 10/31/16 39 35 2 0
11/1/16 - 4/30/17 39 74 7 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
4/14/16 - 10/31/16 56 8 0 0
11/1/16 - 4/30/17 3 0 0 0
Page 8
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)
The investment objective of First Trust RiverFront Dynamic Emerging Markets ETF
(the "Fund") is to provide capital appreciation. Under normal market conditions,
the Fund will seek to achieve its investment objective by investing at least 80%
of its net assets (including investment borrowings) in a portfolio of equity
securities of emerging market companies, including through investments in common
stock, depositary receipts, and common and preferred shares of real estate
investment trusts ("REITs"), and forward foreign currency exchange contracts and
currency spot transactions used to hedge the Fund's exposure to the currencies
in which the equity securities of such emerging market companies are denominated
(each, an "Emerging Market currency" and, collectively, the "Emerging Market
currencies"). The Fund considers an emerging market company to be one (i)
domiciled or with a principal place of business or primary securities trading
market in an emerging market country, or (ii) that derives a substantial portion
of its total revenues or profits from emerging market countries. The Fund
considers an emerging market country to be any country whose issuers are
included in the Morgan Stanley Capital International Emerging Markets Index
and/or those countries considered to be developing by the World Bank, the
International Finance Corporation or the United Nations. The Fund will generally
focus its emerging market company investments in Brazil, Chile, China, Colombia,
the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico,
Morocco, Nigeria, Peru, the Philippines, Poland, Qatar, Russia, South Africa,
South Korea, Taiwan, Thailand, Turkey and/or the United Arab Emirates. Shares of
the Fund are listed on the Nasdaq Stock Exchange LLC under the ticker symbol
"RFEM."
The Fund will utilize a dynamic currency hedging strategy through the use of
forward foreign currency exchange contracts and currency spot transactions to
hedge up to 100% of the Fund's currency exposure. As a result of such dynamic
currency hedging strategy, the portion of the Fund's portfolio securities which
are subject to currency hedging transactions may vary widely, from 0% to 100% of
the portfolio securities. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract, at a price set on the date of the contract. A forward foreign currency
exchange contract may reduce the Fund's exposure to changes in the value of the
currency it will deliver and increase its exposure to changes in the value of
the currency it will receive for the duration of the contract. The effect on the
value of the Fund is similar to selling securities denominated in one currency
and purchasing securities denominated in another currency. The Fund also may
enter into currency spot transactions as part of its dynamic currency hedging
strategy. A currency spot transaction is an agreement between two parties to buy
or sell a specific currency for delivery on a date that is typically two
business days from the date of the agreement, as opposed to a date set in the
future. The underlying currencies of the forward foreign currency exchange
contracts and currency spot transactions included in the Fund's policy relating
to the investment of at least 80% of its net assets (including investment
borrowings) will be limited to Emerging Market currencies.
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
TOTAL RETURNS
6 Months Ended Inception (6/14/16)
4/30/17 to 4/30/17
FUND PERFORMANCE
NAV 9.94% 25.90%
Market Price 9.83% 26.42%
INDEX PERFORMANCE
MSCI Emerging Markets Index 8.88% 24.23%
----------------------------------------------------------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on Page 11.)
Page 9
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) (CONTINUED)
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Financials 24.2%
Information Technology 22.6
Materials 12.2
Consumer Discretionary 11.9
Industrials 7.1
Telecommunication Services 6.8
Energy 5.1
Consumer Staples 2.9
Utilities 2.6
Health Care 2.3
Real Estate 2.3
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Samsung Electronics Co., Ltd. 5.0%
Taiwan Semiconductor Manufacturing Co., Ltd. 4.1
Tencent Holdings Ltd. 3.8
Industrial & Commercial Bank of China Ltd.,
Class H 1.8
Bank of China Ltd., Class H 1.7
CJ Corp. 1.7
China Construction Bank Corp., Class H 1.6
TAL Education Group 1.5
KB Financial Group, Inc. 1.4
Power Finance Corp Ltd 1.4
-------
Total 24.0%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
JUNE 14, 2016 - APRIL 30, 2017
First Trust RiverFront MSCI Emerging
Dynamic Emerging Markets ETF Markets Index
6/14/16 $10,000 $10,000
10/31/16 11,452 11,409
4/30/17 12,590 12,423
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 APRIL 30, 2017
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 15, 2016 (commencement
of trading) through April 30, 2017. 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 AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
6/15/16 - 10/31/16 31 40 16 1
11/1/16 - 4/30/17 56 48 5 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
6/15/16 - 10/31/16 7 2 0 0
11/1/16 - 4/30/17 12 1 1 0
Page 10
--------------------------------------------------------------------------------
NOTES TO FUND PERFORMANCE OVERVIEW
--------------------------------------------------------------------------------
Total returns for the periods since inception are calculated from the inception
date of each Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the periods indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the periods
indicated.
Each Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 each Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
each Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in each Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike each Fund, the indices do not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by each Fund.
These expenses negatively impact the performance of each Fund. Also, market
returns do not include brokerage commissions that may be payable on secondary
market transactions. If brokerage commissions were included, market returns
would be lower. The total returns presented reflect the reinvestment of
dividends on securities in the indices. The returns presented do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. The investment return and principal value of
shares of each Fund will vary with changes in market conditions. Shares of each
Fund may be worth more or less than their original cost when they are redeemed
or sold in the market. Each Fund's past performance is no guarantee of future
performance.
Page 11
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
FIRST TRUST RIVERFRONT DYNAMIC INTERNATIONAL ETFS
SEMI-ANNUAL REPORT
APRIL 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor which
offers customized portfolio management using its structured, quantitative
approach to security selection. As of April 30, 2017, First Trust managed or
supervised $105.533 billion in assets.
SUB-ADVISOR
RIVERFRONT INVESTMENT GROUP, LLC
RiverFront Investment Group, LLC is an SEC-registered investment advisor located
in Richmond, Virginia. It is majority owned by its employees, and Baird
Financial Corporation is a minority owner of RiverFront Investment Holding
Group, LLC. The firm provides asset management services to a series of global
tactical asset allocation portfolios and registered investment companies,
including mutual funds and exchange-traded products.
PORTFOLIO MANAGEMENT TEAM
MICHAEL JONES, CFA -- CHAIRMAN AND CHIEF INVESTMENT OFFICER
DOUG SANDLER, CFA -- CHIEF US EQUITY OFFICER
ADAM GROSSMAN, CFA -- CHIEF GLOBAL EQUITY OFFICER
CHRIS KONSTANTINOS, CFA -- DIRECTOR OF INTERNATIONAL PORTFOLIO MANAGEMENT
SCOTT HAYS -- QUANTITATIVE PORTFOLIO MANAGER
Page 12
FIRST TRUST EXCHANGE-TRADED FUND III
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2017 (UNAUDITED)
As a shareholder of First Trust RiverFront Dynamic Asia Pacific ETF, First Trust
RiverFront Dynamic Developed International ETF, First Trust RiverFront Dynamic
Europe ETF or First Trust RiverFront Dynamic Emerging Markets ETF (each a "Fund"
and collectively, the "Funds"), you incur two types of costs: (1) transaction
costs; and (2) ongoing costs, including management fees, distribution and/or
service fees, if any, and other Fund expenses. This Example is intended to help
you understand your ongoing costs of investing in the Funds and to compare these
costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2017.
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
each Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Funds and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
--------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH THE SIX-MONTH
NOVEMBER 1, 2016 APRIL 30, 2017 PERIOD PERIOD (a)
--------------------------------------------------------------------------------------------------------------------------
FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP)
Actual $1,000.00 $1,070.70 0.83% $4.26
Hypothetical (5% return before expenses) $1,000.00 $1,020.68 0.83% $4.16
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
Actual $1,000.00 $1,140.60 0.83% $4.41
Hypothetical (5% return before expenses) $1,000.00 $1,020.68 0.83% $4.16
FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU)
Actual $1,000.00 $1,177.90 0.83% $4.48
Hypothetical (5% return before expenses) $1,000.00 $1,020.68 0.83% $4.16
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)
Actual $1,000.00 $1,099.40 0.95% $4.95
Hypothetical (5% return before expenses) $1,000.00 $1,020.08 0.95% $4.76
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2016 through April 30, 2017), multiplied by 181/365 (to reflect the
one-half year period).
Page 13
FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) -- 99.4%
AUSTRALIA -- 21.6%
6,021 Amcor Ltd. $ 70,829
27,070 AMP Ltd. 108,647
7,183 Australia & New Zealand
Banking Group Ltd. 176,204
15,485 Bank of Queensland Ltd. 138,794
15,289 Bendigo and Adelaide Bank Ltd. 141,044
9,756 BHP Billiton Ltd. 173,282
7,681 Commonwealth Bank of Australia 502,684
71,079 DUET Group 160,736
4,961 Flight Centre Travel Group Ltd. 116,831
13,767 Insurance Australia Group Ltd. 64,017
7,003 National Australia Bank Ltd. 178,291
40,848 Platinum Asset Management Ltd. 142,535
49,963 Qantas Airways Ltd. 158,628
6,124 QBE Insurance Group Ltd. 59,017
6,358 Suncorp Group Ltd. 65,700
19,545 TPG Telecom Ltd. 86,348
4,094 Wesfarmers Ltd. 131,820
18,663 Westpac Banking Corp. 489,959
----------------
2,965,366
----------------
CANADA -- 2.5%
3,711 CI Financial Corp. 72,586
4,892 Empire Co., Ltd., Class A 75,367
4,555 IGM Financial, Inc. 136,845
6,242 Valeant Pharmaceuticals
International, Inc. (b) 57,845
----------------
342,643
----------------
CAYMAN ISLANDS -- 3.4%
15,695 ASM Pacific Technology Ltd. 233,659
22,000 Kingboard Chemical Holdings
Ltd. 79,336
67,200 MGM China Holdings Ltd. 153,089
----------------
466,084
----------------
HONG KONG -- 4.5%
4,932 CLP Holdings Ltd. 52,025
42,000 Galaxy Entertainment Group Ltd. 233,803
3,400 Henderson Land Development
Co., Ltd. 21,550
28,668 Hysan Development Co., Ltd. 135,262
16,100 Swire Pacific Ltd., Class A 155,032
6,952 Television Broadcasts Ltd. (c) 26,723
----------------
624,395
----------------
JAPAN -- 64.3%
7,600 Alfresa Holdings Corp. 137,103
9,000 Amada Holdings Co., Ltd. 106,894
39,000 Aozora Bank Ltd. 142,041
23,000 Asahi Glass Co., Ltd. 199,309
1,800 Asahi Group Holdings Ltd. 67,899
10,000 Astellas Pharma, Inc. 131,689
6,600 Bandai Namco Holdings, Inc. 206,925
5,400 Calbee, Inc. 188,437
7,000 Canon, Inc. 232,088
8,300 Chubu Electric Power Co., Inc. 111,498
17,000 Dai Nippon Printing Co., Ltd. 189,101
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
JAPAN (CONTINUED)
1,000 Daito Trust Construction Co.,
Ltd. $ 147,118
27,000 Daiwa Securities Group, Inc. 164,047
1,800 Eisai Co., Ltd. 94,493
5,700 Electric Power Development Co.,
Ltd. 132,178
500 FUJIFILM Holdings Corp. 18,542
60,600 GungHo Online Entertainment,
Inc. 135,905
3,900 Haseko Corp. 44,501
10,000 Hitachi Ltd. 55,178
6,600 Honda Motor Co., Ltd. 191,354
12,000 Inpex Corp. 115,021
4,000 Itochu Techno-Solutions Corp. 116,439
3,000 Japan Airlines Co., Ltd. 94,730
3,900 Japan Petroleum Exploration
Co., Ltd. 85,329
3,200 Japan Tobacco, Inc. 106,384
6,600 JFE Holdings, Inc. 112,521
22,600 JXTG Holdings, Inc. 101,997
22,000 Kajima Corp. 149,397
10,800 Kansai Electric Power (The)
Co., Inc. 146,002
11,800 Kobe Steel Ltd. (b) 104,795
300 Konami Holdings Corp. 12,474
800 Kyocera Corp. 45,284
13,200 Matsui Securities Co., Ltd. 107,518
8,300 Mazda Motor Corp. 121,661
5,700 Medipal Holdings Corp. 94,288
800 MEIJI Holdings Co., Ltd. 67,890
1,800 Miraca Holdings, Inc. 82,996
3,500 Mitsubishi Chemical Holdings
Corp. 27,388
3,000 Mitsubishi Estate Co., Ltd. 57,322
40,000 Mitsubishi Heavy Industries
Ltd. 160,036
20,800 Mitsubishi Motors Corp. 133,038
81,000 Mitsubishi Steel Manufacturing
Co., Ltd. 169,303
7,100 Mitsubishi UFJ Financial Group,
Inc. 45,170
23,000 Mitsui-Soko Co., Ltd. 67,674
27,000 NEC Corp. 67,091
5,200 Nippon Paper Industries Co.,
Ltd. 98,286
1,500 Nippon Steel & Sumitomo Metal
Corp. 33,781
5,000 NOK Corp. 118,906
2,800 NTT Data Corp. 129,859
2,800 NTT DOCOMO, Inc. 67,516
17,300 Obayashi Corp. 167,762
18,000 Panasonic Corp. 214,837
3,700 Sankyo Co., Ltd. 128,948
1,700 SCREEN Holdings Co., Ltd. 123,373
9,600 Sega Sammy Holdings, Inc. 128,919
5,500 Seiko Epson Corp. 112,492
20,000 Shimizu Corp. 191,792
2,800 SoftBank Group Corp. 212,044
7,900 Sony Corp. 266,392
Page 14 See Notes to Financial Statements
FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) (CONTINUED)
JAPAN (CONTINUED)
4,900 Subaru Corp. $ 185,143
12,700 Sumitomo Electric Industries
Ltd. 206,948
18,000 Sumitomo Heavy Industries Ltd. 125,463
2,300 Sumitomo Mitsui Financial
Group, Inc. 85,088
500 Sumitomo Mitsui Trust
Holdings, Inc. 17,120
10,000 Sumitomo Osaka Cement Co.,
Ltd. 43,418
500 Suntory Beverage & Food Ltd. 22,359
3,200 Suzuken Co., Ltd. 105,782
3,700 Suzuki Motor Corp. 154,406
2,800 Takeda Pharmaceutical Co., Ltd. 134,179
3,900 Terumo Corp. 142,216
3,900 Tohoku Electric Power Co., Inc. 51,988
14,200 Tokyo Electric Power Co.,
Holdings, Inc. (b) 55,157
12,000 Toppan Printing Co., Ltd. 120,673
3,000 Toyota Industries Corp. 149,092
700 Yaskawa Electric Corp. 13,369
6,200 Yokohama Rubber (The) Co., Ltd. 121,525
----------------
8,816,881
----------------
SINGAPORE -- 3.1%
36,600 Keppel Corp., Ltd. 170,537
93,900 StarHub Ltd. 187,511
27,000 Wilmar International Ltd. 68,604
----------------
426,652
----------------
TOTAL COMMON STOCKS 13,642,021
(Cost $13,438,857) ----------------
RIGHTS (a) -- 0.0%
AUSTRALIA -- 0.0%
1,929 TPG Telecom Ltd., expiring
4/18/17 (b) (c) 939
(Cost $0) ----------------
TOTAL INVESTMENTS - 99.4% 13,642,960
(Cost $13,438,857) (d)
NET OTHER ASSETS AND
LIABILITIES - 0.6% 79,146
----------------
NET ASSETS - 100.0% $ 13,722,106
================
-----------------------------
(a) Portfolio securities are categorized based upon their country of
incorporation. For a breakdown of the portfolio securities by sector,
please see the Fund Performance Overview.
(b) Non-income producing security.
(c) 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 April 30, 2017, securities noted as such are valued at $27,662
or 0.2% of net assets.
(d) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $411,551 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $207,448.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUT INPUT
---------------------------------------------------------
Common Stocks:
Hong Kong $ 624,395 $ 597,672 $ 26,723 $ --
Other Country
Categories* 13,017,626 13,017,626 -- --
---------------------------------------------------------
Total Common
Stocks 13,642,021 13,615,298 26,723 --
Rights* 939 -- 939 --
---------------------------------------------------------
Total Investments $ 13,642,960 $ 13,615,298 $ 27,662 $ --
=========================================================
* See Portfolio of Investments for country 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. As of April
30, 2017, the Fund transferred a common stock valued at $26,723 from Level 1 to
Level 2 of the fair value hierarchy. The common stock that transferred from
Level 1 to Level 2 did so as a result of being halted on the primary exchange.
------------------------------------------------------------
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS
------------------------------------------------------------
JPY 64.6%
AUD 21.7
HKD 8.0
SGD 3.2
USD 1.4
CAD 1.1
-------
Total 100.0%
=======
Currency Abbreviations
AUD Australian Dollar
CAD Canadian Dollar
HKD Hong Kong Dollar
JPY Japanese Yen
SGD Singapore Dollar
USD United States Dollar
See Notes to Financial Statements Page 15
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) -- 99.4%
AUSTRALIA -- 6.9%
17,877 Amcor Ltd. $ 210,299
80,393 AMP Ltd. 322,663
21,332 Australia & New Zealand
Banking Group Ltd. 523,289
45,988 Bank of Queensland Ltd. 412,197
45,402 Bendigo and Adelaide Bank Ltd. 418,843
28,970 BHP Billiton Ltd. 514,552
22,806 Commonwealth Bank of Australia 1,492,541
211,097 DUET Group 477,370
14,735 Flight Centre Travel Group Ltd. 347,006
40,882 Insurance Australia Group Ltd. 190,103
20,797 National Australia Bank Ltd. 529,475
121,312 Platinum Asset Management Ltd. 423,307
148,379 Qantas Airways Ltd. 471,090
18,182 QBE Insurance Group Ltd. 175,221
18,880 Suncorp Group Ltd. 195,095
58,903 TPG Telecom Ltd. 260,229
12,155 Wesfarmers Ltd. 391,371
55,425 Westpac Banking Corp. 1,455,068
----------------
8,809,719
----------------
AUSTRIA -- 2.3%
41,895 RHI AG 1,220,769
94,526 Telekom Austria AG 663,829
24,836 voestalpine AG 1,037,651
----------------
2,922,249
----------------
BELGIUM -- 0.1%
2,235 Proximus S.A. 68,375
----------------
CANADA -- 0.8%
10,811 CI Financial Corp. 211,460
14,623 Empire Co., Ltd., Class A 225,283
13,352 IGM Financial, Inc. 401,132
18,695 Valeant Pharmaceuticals
International, Inc. (b) 173,248
----------------
1,011,123
----------------
CAYMAN ISLANDS -- 1.1%
46,596 ASM Pacific Technology Ltd. 693,697
65,435 Kingboard Chemical Holdings
Ltd. 235,969
200,820 MGM China Holdings Ltd. 457,492
----------------
1,387,158
----------------
DENMARK -- 2.6%
620 AP Moller - Maersk A.S.,
Class A 1,028,756
3,335 Danske Bank A.S. 121,126
16,175 Dfds A.S. 964,353
16,142 DONG Energy A.S. (c) 635,917
6,881 Vestas Wind Systems A.S. 592,542
----------------
3,342,694
----------------
FINLAND -- 3.4%
3,033 Elisa OYJ 103,311
13,654 Kone OYJ, Class B 625,571
20,654 Neste OYJ 843,465
15,362 Sampo OYJ, Class A 736,121
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
FINLAND (CONTINUED)
93,603 Sanoma OYJ $ 825,890
40,782 UPM-Kymmene OYJ 1,076,390
7,749 Valmet OYJ 141,218
----------------
4,351,966
----------------
FRANCE -- 9.1%
6,486 Arkema S.A. 686,808
9,200 AXA S.A. 245,628
5,012 BioMerieux 1,002,104
4,034 BNP Paribas S.A. 284,659
26,968 Chargeurs S.A. 673,010
2,014 Christian Dior SE 552,741
1,771 Cie Generale des Etablissements
Michelin 231,402
67,710 Credit Agricole S.A. 1,006,776
75,162 Electricite de France S.A. 627,646
8,370 Ipsen S.A. 974,199
2,562 Kering 794,118
3,791 LVMH Moet Hennessy Louis
Vuitton SE 935,340
19,276 Neopost S.A. 781,731
17,649 Societe Generale S.A. 965,290
782 Thales S.A. 82,219
25,626 TOTAL S.A. 1,316,722
4,999 Valeo S.A. 359,397
1,514 Vinci S.A. 128,802
----------------
11,648,592
----------------
GERMANY -- 10.1%
5,535 adidas AG 1,108,784
1,835 Allianz SE 349,402
4,622 Bayer AG 571,947
6,515 Beiersdorf AG 648,221
10,377 Covestro AG (c) 808,890
27,457 Deutsche Post AG 986,994
15,561 Fresenius SE & Co., KGaA 1,261,294
11,952 Fuchs Petrolub AG (Preference
Shares) 616,530
36,131 Infineon Technologies AG 747,793
12,445 LANXESS AG 898,785
7,292 Merck KGaA 856,274
18,463 SAP SE 1,851,688
6,230 Siemens AG 893,082
47,377 TUI AG 689,103
3,884 Volkswagen AG (Preference
Shares) 615,799
----------------
12,904,586
----------------
HONG KONG -- 1.4%
14,105 CLP Holdings Ltd. 148,787
124,105 Galaxy Entertainment Group Ltd. 690,859
8,869 Henderson Land Development
Co., Ltd. 56,213
85,741 Hysan Development Co., Ltd. 404,545
49,120 Swire Pacific Ltd., Class A 472,991
20,331 Television Broadcasts Ltd. (d) 78,152
----------------
1,851,547
----------------
Page 16 See Notes to Financial Statements
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) (CONTINUED)
ITALY -- 1.3%
32,672 Enel S.p.A. $ 155,313
240,118 Intesa Sanpaolo S.p.A. 656,517
149,911 Intesa Sanpaolo S.p.A. 436,659
60,730 Poste Italiane S.p.A.(c) 416,104
15,630 Snam S.p.A. 69,090
----------------
1,733,683
----------------
JAPAN -- 20.5%
22,500 Alfresa Holdings Corp. 405,898
26,600 Amada Holdings Co., Ltd. 315,931
119,000 Aozora Bank Ltd. 433,407
71,000 Asahi Glass Co., Ltd. 615,259
5,200 Asahi Group Holdings Ltd. 196,152
29,800 Astellas Pharma, Inc. 392,432
19,300 Bandai Namco Holdings, Inc. 605,100
16,300 Calbee, Inc. 568,800
20,800 Canon, Inc. 689,633
25,000 Chubu Electric Power Co., Inc. 335,838
47,000 Dai Nippon Printing Co., Ltd. 522,808
3,000 Daito Trust Construction
Co., Ltd. 441,355
82,000 Daiwa Securities Group, Inc. 498,216
5,500 Eisai Co., Ltd. 288,728
17,300 Electric Power Development Co.,
Ltd. 401,171
1,400 FUJIFILM Holdings Corp. 51,918
179,835 GungHo Online Entertainment,
Inc. 403,308
11,800 Haseko Corp. 134,645
31,000 Hitachi Ltd. 171,053
19,300 Honda Motor Co., Ltd. 559,566
35,500 Inpex Corp. 340,271
12,000 Itochu Techno-Solutions Corp. 349,316
8,900 Japan Airlines Co., Ltd. 281,032
11,500 Japan Petroleum Exploration Co.,
Ltd. 251,613
9,300 Japan Tobacco, Inc. 309,180
19,400 JFE Holdings, Inc. 330,744
67,100 JXTG Holdings, Inc. 302,830
61,000 Kajima Corp. 414,236
31,700 Kansai Electric Power (The) Co.,
Inc. 428,544
35,200 Kobe Steel Ltd. (b) 312,608
700 Konami Holdings Corp. 29,105
2,900 Kyocera Corp. 164,153
39,100 Matsui Securities Co., Ltd. 318,482
24,800 Mazda Motor Corp. 363,518
17,200 Medipal Holdings Corp. 284,519
2,600 MEIJI Holdings Co., Ltd. 220,641
5,300 Miraca Holdings, Inc. 244,378
10,100 Mitsubishi Chemical Holdings
Corp. 79,033
11,500 Mitsubishi Estate Co., Ltd. 219,735
122,000 Mitsubishi Heavy Industries Ltd. 488,109
61,800 Mitsubishi Motors Corp. 395,276
238,000 Mitsubishi Steel Manufacturing
Co., Ltd. 497,457
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
JAPAN (CONTINUED)
21,100 Mitsubishi UFJ Financial Group,
Inc. $ 134,237
70,000 Mitsui-Soko Co., Ltd. 205,966
82,000 NEC Corp. 203,759
16,000 Nippon Paper Industries
Co., Ltd. 302,418
4,400 Nippon Steel & Sumitomo Metal
Corp. 99,091
14,900 NOK Corp. 354,339
8,300 NTT Data Corp. 384,938
8,400 NTT DOCOMO, Inc. 202,549
51,500 Obayashi Corp. 499,408
53,600 Panasonic Corp. 639,738
10,600 Sankyo Co., Ltd. 369,419
4,900 SCREEN Holdings Co., Ltd. 355,604
28,100 Sega Sammy Holdings, Inc. 377,356
16,400 Seiko Epson Corp. 335,430
57,000 Shimizu Corp. 546,607
8,700 SoftBank Group Corp. 658,851
23,400 Sony Corp. 789,061
14,500 Subaru Corp. 547,872
37,100 Sumitomo Electric Industries
Ltd. 604,550
55,000 Sumitomo Heavy Industries Ltd. 383,360
7,200 Sumitomo Mitsui Financial
Group, Inc. 266,363
1,400 Sumitomo Mitsui Trust Holdings,
Inc. 47,937
30,000 Sumitomo Osaka Cement Co.,
Ltd. 130,253
1,200 Suntory Beverage & Food Ltd. 53,662
9,200 Suzuken Co., Ltd. 304,122
10,600 Suzuki Motor Corp. 442,352
8,600 Takeda Pharmaceutical Co., Ltd. 412,121
11,600 Terumo Corp. 423,001
11,900 Tohoku Electric Power Co., Inc. 158,631
42,300 Tokyo Electric Power Co.,
Holdings, Inc. (b) 164,305
35,000 Toppan Printing Co., Ltd. 351,962
9,000 Toyota Industries Corp. 447,275
1,800 Yaskawa Electric Corp. 34,377
18,600 Yokohama Rubber (The) Co., Ltd. 364,575
----------------
26,251,487
----------------
NETHERLANDS -- 4.7%
3,932 ASML Holding N.V. 519,757
5,800 BE Semiconductor Industries
N.V. 303,008
63,473 CNH Industrial N.V. 700,400
76,795 Fiat Chrysler Automobiles
N.V. (b) 869,152
203,813 Koninklijke KPN N.V. 589,446
9,287 Koninklijke Philips N.V. 321,902
21,824 NN Group N.V. 723,647
70,056 STMicroelectronics N.V. 1,133,233
17,114 Unilever N.V. 897,533
----------------
6,058,078
----------------
NORWAY -- 1.3%
20,235 DNB ASA 316,039
57,458 Entra ASA (c) 659,168
See Notes to Financial Statements Page 17
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) (CONTINUED)
NORWAY (CONTINUED)
135,088 Norsk Hydro ASA $ 770,942
----------------
1,746,149
----------------
PORTUGAL -- 0.1%
27,431 EDP -- Energias de Portugal
S.A. 90,538
----------------
SINGAPORE -- 1.0%
108,900 Keppel Corp., Ltd. 507,418
278,800 StarHub Ltd. 556,742
80,300 Wilmar International Ltd. 204,033
----------------
1,268,193
----------------
SPAIN -- 5.3%
17,097 ACS Actividades de Construccion
y Servicios S.A. 633,767
224,241 Banco Bilbao Vizcaya Argentaria
S.A. 1,795,109
288,271 Banco Santander S.A. 1,879,999
15,723 Endesa S.A. 370,544
224,516 Faes Farma S.A. 807,065
5,132 Gas Natural SDG S.A. 116,054
24,132 Iberdrola S.A. 173,547
63,613 Repsol S.A. 1,007,183
----------------
6,783,268
----------------
SWEDEN -- 2.8%
22,340 ICA Gruppen AB 762,717
48,275 Nordea Bank AB 594,084
17,253 Ratos AB, Class B 80,915
75,285 Sandvik AB 1,208,667
5,966 Swedbank AB, Class A 141,382
201,881 Telia Co., AB 822,813
----------------
3,610,578
----------------
SWITZERLAND -- 8.2%
1,667 Cembra Money Bank AG 142,240
1,109 Galenica AG 1,204,853
17,146 Nestle S.A. 1,320,845
15,665 Oriflame Holding AG 642,001
3,382 Roche Holding AG 884,758
162 Sika AG 1,033,869
11,953 Sonova Holding AG 1,767,122
13,480 Swiss Re AG 1,173,234
193 Swisscom AG 84,183
5,307 Tecan Group AG 905,657
67,159 Transocean, Ltd. (b) 740,764
37,244 UBS Group AG 636,330
----------------
10,535,856
----------------
UNITED KINGDOM -- 16.4%
252,247 Aberdeen Asset Management
PLC 911,522
54,014 Aggreko PLC 620,885
26,351 Anglo American PLC (b) 377,646
21,746 Associated British Foods PLC 791,448
125,006 Barratt Developments PLC 938,255
161,980 BBA Aviation PLC 653,096
66,090 BP PLC 378,779
34,275 British American Tobacco PLC 2,315,094
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
UNITED KINGDOM (CONTINUED)
211,660 BT Group PLC $ 835,448
306,250 Centrica PLC 784,980
16,738 Diageo PLC 487,020
166,837 G4S PLC 659,282
33,045 Hikma Pharmaceuticals PLC 829,034
154,831 HSBC Holdings PLC 1,276,419
9,927 Imperial Brands PLC 486,269
240,958 Legal & General Group PLC 768,051
34,225 Mondi PLC 887,008
17,772 Persimmon PLC 536,326
10,191 Provident Financial PLC 422,908
27,161 Royal Dutch Shell PLC, Class A 704,458
31,193 Smiths Group PLC 662,579
214,796 Standard Life PLC 1,012,384
106,760 Tate & Lyle PLC 1,046,055
171,568 Taylor Wimpey PLC 444,430
12,284 Unilever PLC 631,955
58,970 Weir Group (The) PLC 1,520,685
----------------
20,982,016
----------------
TOTAL COMMON STOCKS 127,357,855
(Cost $119,429,230) ----------------
RIGHTS (a) -- 0.0%
AUSTRALIA -- 0.0%
5,381 TPG Telecom Ltd., expiring
4/18/17 (b) (d) 2,619
(Cost $0) ----------------
TOTAL INVESTMENTS - 99.4% 127,360,474
(Cost $119,429,230) (e)
NET OTHER ASSETS AND
LIABILITIES - 0.6% 752,569
----------------
NET ASSETS - 100.0% $ 128,113,043
================
-----------------------------
(a) Portfolio securities are categorized based upon their country of
incorporation. For a breakdown of the portfolio securities by sector,
please see the Fund Performance Overview.
(b) Non-income producing security.
(c) 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 on which
it trades freely without any additional registration. As such, it does not
require the additional disclosure required of restricted securities.
(d) 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 April 30, 2017, securities noted as such are valued at $80,771
or 0.1% of net assets.
Page 18 See Notes to Financial Statements
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $8,722,888 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $791,644.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUT INPUT
---------------------------------------------------------
Common Stocks:
Hong Kong $ 1,851,547 $ 1,773,395 $ 78,152 $ --
Other Country
Categories* 125,506,308 125,506,308 -- --
---------------------------------------------------------
Total Common
Stocks 127,357,855 127,279,703 78,152 --
Rights* 2,619 -- 2,619 --
---------------------------------------------------------
Total Investments $127,360,474 $127,279,703 $ 80,771 $ --
=========================================================
* See Portfolio of Investments for country 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. As of April
30, 2017, the Fund transferred a common stock valued at $16,529 from Level 1 to
Level 2 of the fair value hierarchy. The common stock that transferred from
Level 1 to Level 2 did so as a result of being halted on the primary exchange.
------------------------------------------------------------
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS
------------------------------------------------------------
EUR 36.0%
JPY 20.6
GBP 17.0
CHF 7.2
AUD 6.9
SEK 3.4
DKK 2.6
HKD 2.6
NOK 1.4
SGD 1.0
USD 1.0
CAD 0.3
-------
Total 100.0%
=======
Currency Abbreviations
AUD Australian Dollar
CAD Canadian Dollar
CHF Swiss Franc
DKK Danish Krone
EUR Euro
GBP British Pound Sterling
HKD Hong Kong Dollar
JPY Japanese Yen
NOK Norwegian Krone
SEK Swedish Krona
SGD Singapore Dollar
USD United States Dollar
See Notes to Financial Statements Page 19
FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) -- 99.3%
AUSTRIA -- 3.4%
20,010 RHI AG $ 583,067
44,826 Telekom Austria AG 314,800
11,844 voestalpine AG 494,844
----------------
1,392,711
----------------
BELGIUM -- 0.1%
1,055 Proximus S.A. 32,276
----------------
DENMARK -- 3.8%
294 AP Moller -- Maersk A.S.,
Class A 487,829
1,594 Danske Bank A.S. 57,894
7,718 Dfds A.S. 460,147
7,841 DONG Energy A.S. (b) 308,897
3,278 Vestas Wind Systems A.S. 282,278
----------------
1,597,045
----------------
FINLAND -- 5.0%
1,431 Elisa OYJ 48,743
6,490 Kone OYJ, Class B 297,346
9,778 Neste OYJ 399,313
7,317 Sampo OYJ, Class A 350,618
44,410 Sanoma OYJ 391,844
19,383 UPM-Kymmene OYJ 511,590
3,589 Valmet OYJ 65,406
----------------
2,064,860
----------------
FRANCE -- 13.3%
3,062 Arkema S.A. 324,238
4,319 AXA S.A. 115,312
2,350 BioMerieux 469,861
1,902 BNP Paribas S.A. 134,214
12,631 Chargeurs S.A. 315,218
960 Christian Dior SE 263,471
845 Cie Generale des Etablissements
Michelin 110,409
32,079 Credit Agricole S.A. 476,981
35,700 Electricite de France S.A. 298,116
3,963 Ipsen S.A. 461,260
1,219 Kering 377,842
1,799 LVMH Moet Hennessy Louis
Vuitton SE 443,861
9,113 Neopost S.A. 369,574
8,394 Societe Generale S.A. 459,099
373 Thales S.A. 39,217
12,093 TOTAL S.A. 621,366
2,384 Valeo S.A. 171,395
724 Vinci S.A. 61,594
----------------
5,513,028
----------------
GERMANY -- 14.8%
2,626 adidas AG 526,046
861 Allianz SE 163,943
2,208 Bayer AG 273,228
3,091 Beiersdorf AG 307,544
4,916 Covestro AG (b) 383,204
12,981 Deutsche Post AG 466,626
7,387 Fresenius SE & Co., KGaA 598,752
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
GERMANY (CONTINUED)
5,672 Fuchs Petrolub AG (Preference
Shares) $ 292,583
18,563 Infineon Technologies AG 384,193
5,902 LANXESS AG 426,246
3,556 Merck KGaA 417,569
8,757 SAP SE 878,256
2,952 Siemens AG 423,175
22,301 TUI AG 324,370
1,834 Volkswagen AG (Preference
Shares) 290,776
----------------
6,156,511
----------------
ITALY -- 2.0%
15,453 Enel S.p.A. 73,459
71,342 Intesa Sanpaolo S.p.A. 207,804
114,852 Intesa Sanpaolo S.p.A. 314,022
28,971 Poste Italiane S.p.A. (b) 198,500
7,390 Snam S.p.A. 32,667
----------------
826,452
----------------
NETHERLANDS -- 7.0%
1,919 ASML Holding N.V. 253,666
2,828 BE Semiconductor Industries
N.V. 147,743
30,291 CNH Industrial N.V. 334,249
36,292 Fiat Chrysler Automobiles
N.V. (c) 410,746
96,309 Koninklijke KPN N.V. 278,534
4,390 Koninklijke Philips N.V. 152,164
10,359 NN Group N.V. 343,487
34,585 STMicroelectronics N.V. 559,451
8,171 Unilever N.V. 428,523
----------------
2,908,563
----------------
NORWAY -- 2.0%
9,692 DNB ASA 151,374
27,283 Entra ASA (b) 312,995
64,906 Norsk Hydro ASA 370,416
----------------
834,785
----------------
PORTUGAL -- 0.1%
13,099 EDP -- Energias de Portugal
S.A. 43,234
----------------
SPAIN -- 7.8%
8,121 ACS Actividades de Construccion
y Servicios S.A. 301,036
106,332 Banco Bilbao Vizcaya Argentaria
S.A. 851,216
137,092 Banco Santander S.A. 894,065
7,515 Endesa S.A. 177,106
105,758 Faes Farma S.A. 380,167
2,470 Gas Natural SDG S.A. 55,856
11,457 Iberdrola S.A. 82,394
29,951 Repsol S.A. 474,213
----------------
3,216,053
----------------
SWEDEN -- 4.1%
10,563 ICA Gruppen AB 360,635
22,973 Nordea Bank AB 282,711
8,093 Ratos AB, Class B 37,955
Page 20 See Notes to Financial Statements
FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) (CONTINUED)
SWEDEN (CONTINUED)
35,700 Sandvik AB $ 573,148
2,822 Swedbank AB, Class A 66,876
96,420 Telia Co., AB 392,982
----------------
1,714,307
----------------
SWITZERLAND -- 12.0%
790 Cembra Money Bank AG 67,408
523 Galenica AG 568,204
8,130 Nestle S.A. 626,296
7,586 Oriflame Holding AG 310,898
1,606 Roche Holding AG 420,142
76 Sika AG 485,025
5,653 Sonova Holding AG 835,735
6,342 Swiss Re AG 551,977
92 Swisscom AG 40,129
2,487 Tecan Group AG 424,415
31,771 Transocean, Ltd. (c) 350,434
17,592 UBS Group AG 300,567
----------------
4,981,230
----------------
UNITED KINGDOM -- 23.9%
119,803 Aberdeen Asset Management PLC 432,921
25,184 Aggreko PLC 289,488
12,486 Anglo American PLC (c) 178,942
10,297 Associated British Foods PLC 374,761
58,619 Barratt Developments PLC 439,976
76,402 BBA Aviation PLC 308,050
31,059 BP PLC 178,007
16,348 British American Tobacco PLC 1,104,220
98,715 BT Group PLC 389,640
145,467 Centrica PLC 372,861
7,946 Diageo PLC 231,202
78,999 G4S PLC 312,177
15,451 Hikma Pharmaceuticals PLC 387,635
73,667 HSBC Holdings PLC 607,307
4,719 Imperial Brands PLC 231,158
113,815 Legal & General Group PLC 362,784
16,128 Mondi PLC 417,989
8,331 Persimmon PLC 251,414
4,876 Provident Financial PLC 202,345
12,805 Royal Dutch Shell PLC, Class A 332,115
15,089 Smiths Group PLC 320,510
102,259 Standard Life PLC 481,970
50,896 Tate & Lyle PLC 498,689
80,351 Taylor Wimpey PLC 208,141
5,846 Unilever PLC 300,749
27,693 Weir Group (The) PLC 714,131
----------------
9,929,182
----------------
TOTAL INVESTMENTS - 99.3% 41,210,237
(Cost $38,011,230) (d)
NET OTHER ASSETS AND
LIABILITIES - 0.7% 295,405
----------------
NET ASSETS - 100.0% $ 41,505,642
================
-----------------------------
(a) Portfolio securities are categorized based upon their country of
incorporation. For a breakdown of the portfolio securities by sector,
please see the Fund Performance Overview.
(b) 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.
(c) Non-income producing security.
(d) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $3,405,984 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $206,977.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUT INPUT
---------------------------------------------------------
Common Stocks* $ 41,210,237 $ 41,210,237 $ -- $ --
=========================================================
* See the Portfolio of Investments for country 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 April 30, 2017.
------------------------------------------------------------
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS
------------------------------------------------------------
EUR 53.0%
GBP 24.9
CHF 10.5
SEK 4.9
DKK 3.9
NOK 2.0
USD 0.8
-------
Total 100.0%
=======
Currency Abbreviations
CHF Swiss Franc
DKK Danish Krone
EUR Euro
GBP British Pound Sterling
NOK Norwegian Krone
SEK Swedish Krona
USD Unites States Dollar
See Notes to Financial Statements Page 21
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) -- 99.1%
BERMUDA -- 1.0%
212,500 Nine Dragons Paper Holdings
Ltd. $ 229,483
----------------
BRAZIL -- 7.6%
25,120 Banco do Brasil S.A. 259,981
42,129 Banco do Estado do Rio Grande
do Sul S.A. (Preference
Shares) 188,608
24,660 BB Seguridade Participacoes
S.A. 232,223
23,197 Braskem S.A. (Preference
Shares) 249,506
60,061 JBS S.A. 194,334
38,883 Kroton Educacional S.A. 183,142
12,734 Lojas Renner S.A. 118,672
135,019 Metalurgica Gerdau S.A.
(Preference Shares) (b) 195,677
14,648 Telefonica Brasil S.A.
(Preference Shares) 218,240
----------------
1,840,383
----------------
CAYMAN ISLANDS -- 10.5%
1,102 Baidu, Inc., ADR (b) 198,613
1,002 NetEase, Inc., ADR 265,921
4,006 New Oriental Education &
Technology Group Inc.,
ADR (b) 258,547
91,751 Shimao Property Holdings Ltd. 147,446
3,105 TAL Education Group, ADR (b) 369,837
28,874 Tencent Holdings Ltd. 903,525
12,619 Vipshop Holdings Ltd., ADR (b) 175,026
3,706 Weibo Corp., ADR (b) 207,017
----------------
2,525,932
----------------
CHILE -- 0.3%
404,192 Enel Americas S.A. 80,262
----------------
CHINA -- 11.5%
519,000 Agricultural Bank of China
Ltd., Class H 239,538
852,982 Bank of China Ltd., Class H 413,422
462,481 China Construction Bank Corp.,
Class H 375,771
41,250 China Life Insurance Co., Ltd.,
Class H 125,420
49,998 China Merchants Bank Co., Ltd.,
Class H 129,842
316,992 China Petroleum & Chemical
Corp., Class H 256,745
619,001 China Telecom Corp., Ltd.,
Class H 302,404
96,400 Guangzhou R&F Properties Co.,
Ltd., Class H 162,353
665,491 Industrial & Commercial Bank of
China Ltd., Class H 434,629
48,500 Shanghai Fosun Pharmaceutical
Group Co., Ltd., Class H 183,005
280,000 Sinopec Shanghai Petrochemical
Co., Ltd., Class H 156,589
----------------
2,779,718
----------------
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COLOMBIA -- 1.7%
54,958 Almacenes Exito S.A. $ 284,691
29,996 Interconexion Electrica
S.A. ESP 118,883
----------------
403,574
----------------
CZECH REPUBLIC -- 0.8%
16,970 O2 Czech Republic A.S. 200,348
----------------
EGYPT -- 0.9%
47,380 ElSwedy Electric Co. 207,370
----------------
HONG KONG -- 0.5%
562,000 China South City Holdings Ltd. 109,823
----------------
INDIA -- 8.6%
50,565 Bharti Airtel Ltd. 279,039
13,211 Glenmark Pharmaceuticals Ltd. 183,584
25,569 Hindustan Petroleum Corp., Ltd. 213,042
8,253 Housing Development Finance
Corp., Ltd. 197,184
77,517 Oil & Natural Gas Corp., Ltd. 224,188
132,022 Power Finance Corp Ltd 328,362
7,084 Reliance Industries Ltd. 153,534
69,482 Sterlite Technologies Ltd. 158,017
4,695 Tata Consultancy Services Ltd. 166,037
33,069 Tata Motors Ltd. 143,832
3,310 Wipro Ltd. 25,495
----------------
2,072,314
----------------
INDONESIA -- 3.6%
123,789 Bank Central Asia Tbk PT 164,848
1,522,129 Surya Citra Media Tbk PT 326,603
614,240 Telekomunikasi Indonesia
Persero Tbk PT 201,382
87,033 United Tractors Tbk PT 175,646
----------------
868,479
----------------
ISRAEL -- 2.2%
40,963 AudioCodes Ltd. (b) 264,621
47,789 Harel Insurance Investments &
Financial Services Ltd. 254,396
----------------
519,017
----------------
MALAYSIA -- 1.1%
82,900 Tenaga Nasional Bhd 266,212
----------------
MEXICO -- 3.2%
321,717 America Movil S.A.B. de C.V.,
Series L 247,287
124,888 Cemex S.A.B. de C.V. (c) 114,969
66,611 Grupo Simec S.A.B. de C.V.,
Series B (b) 247,687
133,991 OHL Mexico SAB de C.V. 163,563
----------------
773,506
----------------
PHILIPPINES -- 1.6%
1,009,500 Petron Corp. 184,060
87,030 San Miguel Corp. 191,600
----------------
375,660
----------------
Page 22 See Notes to Financial Statements
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
COMMON STOCKS (a) (CONTINUED)
POLAND -- 1.9%
9,347 Bank Handlowy w Warszawie
S.A. $ 180,593
7,746 Bank Pekao S.A. 280,651
----------------
461,244
----------------
SOUTH AFRICA -- 3.8%
34,077 Coronation Fund Managers Ltd. 161,642
75,147 FirstRand Ltd. 280,316
749 Naspers Ltd. 142,279
10,850 Nedbank Group Ltd. 183,042
13,870 Standard Bank Group Ltd. 153,980
----------------
921,259
----------------
SOUTH KOREA -- 25.0%
10,819 Cheil Worldwide, Inc. 175,420
734 CJ CheilJedang Corp. 219,961
2,408 CJ Corp. 395,725
10,192 Daou Technology, Inc. 185,855
28,012 Dongkuk Steel Mill Co., Ltd. 273,252
7,102 Hanwha Corp. 249,341
15,097 Hyundai BNG Steel Co., Ltd. 168,496
5,283 Hyundai Development
Co-Engineering &
Construction 207,532
1,194 Hyundai Mobis Co., Ltd. 232,945
1,226 Hyundai Motor Co. 155,149
1,873 Hyundai Motor Co. (2nd
Preference Shares) 163,449
1,945 Hyundai Motor Co. (Preference
Shares) 157,767
7,739 KB Financial Group, Inc. 340,736
5,424 Kia Motors Corp. 166,119
4,100 Korea Electric Power Corp. 163,402
11,217 KT Corp., ADR 186,090
938 Lotte Chemical Corp. 281,919
1,300 POSCO 305,607
606 Samsung Electronics Co., Ltd. 1,188,141
7,794 Shinhan Financial Group
Co., Ltd. 325,692
1,333 SK Holdings Co., Ltd. 284,078
936 Yuhan Corp. 190,836
----------------
6,017,512
----------------
TAIWAN -- 10.2%
20,031 Advantech Co., Ltd. 161,996
89,136 Cathay Financial Holding Co.,
Ltd. 142,991
201,308 China General Plastics Corp 177,815
38,058 MediaTek, Inc. 273,726
9,014 Nien Made Enterprise Co., Ltd. 91,272
52,080 Novatek Microelectronics Corp. 200,235
59,090 Realtek Semiconductor Corp. 199,767
70,107 Simplo Technology Co., Ltd. 234,689
151,231 Taiwan Semiconductor
Manufacturing Co., Ltd. 974,924
----------------
2,457,415
----------------
SHARES DESCRIPTION VALUE
------------- ------------------------------ ----------------
TURKEY -- 3.1%
39,918 Akbank TAS $ 106,876
47,226 Koza Altin Isletmeleri A.S. (b) 256,742
197,092 Petkim Petrokimya Holding A.S. 272,448
41,771 Turkiye Garanti Bankasi A.S. 112,779
----------------
748,845
----------------
TOTAL COMMON STOCKS 23,858,356
(Cost $22,124,654) ----------------
REAL ESTATE INVESTMENT TRUSTS (a) -- 0.5%
TURKEY -- 0.5%
151,985 AKIS Gayrimenkul Yatirimi A.S. 123,233
(Cost $125,576) ----------------
TOTAL INVESTMENTS - 99.6% 23,981,589
(Cost $22,250,230) (d)
NET OTHER ASSETS AND
LIABILITIES - 0.4% 92,499
----------------
NET ASSETS - 100.0% $ 24,074,088
================
-----------------------------
(a) Portfolio securities are categorized based upon their country of
incorporation. For a breakdown of the portfolio securities by sector,
please see the Fund Performance Overview.
(b) Non-income producing security.
(c) Non-income producing security which makes in-kind distributions. There
were no in-kind distributions received for the six months ended April 30,
2017.
(d) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $2,083,705 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $352,346.
ADR American Depositary Receipt
See Notes to Financial Statements Page 23
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUT INPUT
---------------------------------------------------------
Common Stocks* $ 23,858,356 $ 23,858,356 $ -- $ --
Real Estate
Investment
Trusts* 123,233 123,233 -- --
---------------------------------------------------------
Total Investments $ 23,981,589 $ 23,981,589 $ -- $ --
=========================================================
* See Portfolio of Investments for country 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 April 30, 2017.
------------------------------------------------------------
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS
------------------------------------------------------------
KRW 24.3%
HKD 17.4
TWD 10.3
INR 8.6
USD 8.0
BRL 7.7
ZAR 3.9
IDR 3.6
TRY 3.6
MXN 3.2
PLN 1.9
COP 1.7
PHP 1.6
MYR 1.1
ILS 1.1
EGP 0.9
CZK 0.8
CLP 0.3
-------
Total 100.0%
=======
Currency Abbreviations:
BRL Brazilian Real
CLP Chilean Peso
COP Colombian Peso
CZK Czech Koruna
EGP Egyptian Pound
HKD Hong Kong Dollar
IDR Indonesian Rupiah
ILS Israeli Shekel
INR Indian Rupee
KRW South Korean Won
MXN Mexican Peso
MYR Malaysian Ringgit
PHP Philippine Peso
PLN Polish Zloty
TRY Turkish Lira
TWD New Taiwan Dollar
USD United States Dollar
ZAR South African Rand
Page 24 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30, 2017 (UNAUDITED)
FIRST TRUST FIRST TRUST
FIRST TRUST RIVERFRONT FIRST TRUST RIVERFRONT
RIVERFRONT DYNAMIC RIVERFRONT DYNAMIC
DYNAMIC DEVELOPED DYNAMIC EMERGING
ASIA PACIFIC INTERNATIONAL EUROPE MARKETS
ETF ETF ETF ETF
(RFAP) (RFDI) (RFEU) (RFEM)
-------------- -------------- -------------- --------------
ASSETS:
Investments, at value..................................... $ 13,642,960 $ 127,360,474 $ 41,210,237 $ 23,981,589
Cash...................................................... -- 77,927 84,374 87,361
Foreign currency.......................................... 1,634 63,092 21,879 1,634
Receivables:
Dividends.............................................. 98,169 579,514 149,934 21,440
Dividend reclaims...................................... 901 88,481 66,418 613
Investment securities sold............................. 8,495 23,714 -- --
-------------- -------------- -------------- --------------
Total Assets........................................... 13,752,159 128,193,202 41,532,842 24,092,637
-------------- -------------- -------------- --------------
LIABILITIES:
Due to custodian.......................................... 20,794 -- -- --
Payables:
Investment advisory fees............................... 9,259 80,159 27,200 18,549
-------------- -------------- -------------- --------------
Total Liabilities...................................... 30,053 80,159 27,200 18,549
-------------- -------------- -------------- --------------
NET ASSETS................................................ $ 13,722,106 $ 128,113,043 $ 41,505,642 $ 24,074,088
============== ============== ============== ==============
NET ASSETS CONSIST OF:
Paid-in capital........................................... $ 12,587,865 $ 116,660,273 $ 37,479,722 $ 21,563,394
Par value................................................. 2,500 22,000 7,000 4,000
Accumulated net investment income (loss).................. 69,644 885,495 303,224 16,886
Accumulated net realized gain (loss) on investments,
forward foreign currency contracts and foreign
currency transactions.................................. 858,428 2,611,077 515,788 758,489
Net unrealized appreciation (depreciation) on investments,
forward foreign currency contracts, and foreign
currency translation................................... 203,669 7,934,198 3,199,908 1,731,319
-------------- -------------- -------------- --------------
NET ASSETS................................................ $ 13,722,106 $ 128,113,043 $ 41,505,642 $ 24,074,088
============== ============== ============== ==============
NET ASSET VALUE, per share................................ $ 54.89 $ 58.23 $ 59.29 $ 60.18
============== ============== ============== ==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)................. 250,002 2,200,002 700,002 400,002
============== ============== ============== ==============
Investments, at cost...................................... $ 13,438,857 $ 119,429,230 $ 38,011,230 $ 22,250,230
============== ============== ============== ==============
Foreign currency, at cost (proceeds)...................... $ 1,630 $ 63,096 $ 21,886 $ 1,630
============== ============== ============== ==============
See Notes to Financial Statements Page 25
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
FIRST TRUST FIRST TRUST
FIRST TRUST RIVERFRONT FIRST TRUST RIVERFRONT
RIVERFRONT DYNAMIC RIVERFRONT DYNAMIC
DYNAMIC DEVELOPED DYNAMIC EMERGING
ASIA PACIFIC INTERNATIONAL EUROPE MARKETS
ETF ETF ETF ETF
(RFAP) (RFDI) (RFEU) (RFEM)
-------------- -------------- -------------- --------------
INVESTMENT INCOME:
Dividends................................................. $ 209,471 $ 1,417,763 $ 480,724 $ 169,283
Interest.................................................. 65 -- 119 302
Foreign tax withholding................................... (11,769) (109,060) (39,939) (37,829)
Other..................................................... -- 3 -- 100
-------------- -------------- -------------- --------------
Total investment income................................ 197,767 1,308,706 440,904 131,856
-------------- -------------- -------------- --------------
EXPENSES:
Investment advisory fees.................................. 55,944 303,079 113,330 75,656
-------------- -------------- -------------- --------------
Total expenses......................................... 55,944 303,079 113,330 75,656
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS).............................. 141,823 1,005,627 327,574 56,200
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................ (148,810) (1,413,681) (858,924) 256,531
In-kind redemptions.................................... 1,285,176 3,928,969 1,069,039 520,082
Forward foreign currency contracts..................... (56,848) 38,879 259,055 --
Foreign currency transactions.......................... (8,949) 65,952 25,502 (17,885)
-------------- -------------- -------------- --------------
Net realized gain (loss).................................. 1,070,569 2,620,119 494,672 758,728
-------------- -------------- -------------- --------------
Net increase from payment by the advisor.................. -- 5,597 -- --
-------------- -------------- -------------- --------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................ (367,883) 8,305,269 3,987,762 1,260,776
Forward foreign currency contracts..................... -- 40,087 57,751 --
Foreign currency translation........................... 4,200 5,353 3,706 155
-------------- -------------- -------------- --------------
Net change in unrealized appreciation (depreciation)...... (363,683) 8,350,709 4,049,219 1,260,931
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................... 706,886 10,976,425 4,543,891 2,019,659
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............................. $ 848,709 $ 11,982,052 $ 4,871,465 $ 2,075,859
============== ============== ============== ==============
Page 26 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF CHANGES IN NET ASSETS
FIRST TRUST
FIRST TRUST RIVERFRONT
RIVERFRONT DYNAMIC DYNAMIC DEVELOPED
ASIA PACIFIC ETF INTERNATIONAL ETF
(RFAP) (RFDI)
-------------- -------------- -------------- --------------
SIX MONTHS FOR THE PERIOD SIX MONTHS FOR THE PERIOD
ENDED 4/13/2016 (a) ENDED 4/13/2016 (a)
4/30/2017 THROUGH 4/30/2017 THROUGH
(UNAUDITED) 10/31/2016 (UNAUDITED) 10/31/2016
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss).............................. $ 141,823 $ 275,380 $ 1,005,627 $ 414,870
Net realized gain (loss).................................. 1,070,569 (266,297) 2,620,119 670,091
Net increase from payment by the advisor ................. -- -- 5,597 --
Net change in unrealized appreciation (depreciation)...... (363,683) 567,352 8,350,709 (416,511)
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets resulting from
operations............................................. 848,709 576,435 11,982,052 668,450
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (130,952) (162,451) (113,425) (351,001)
Net realized gain......................................... -- -- (201,961) --
-------------- -------------- -------------- --------------
Total distributions to shareholders....................... (130,952) (162,451) (315,386) (351,001)
-------------- -------------- -------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold................................. 16,098,604 25,656,850 137,923,062 30,564,880
Cost of shares redeemed................................... (29,165,089) -- (47,156,104) (5,202,910)
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets resulting from
shareholder transactions............................... (13,066,485) 25,656,850 90,766,958 25,361,970
-------------- -------------- -------------- --------------
Total increase (decrease) in net assets................... (12,348,728) 26,070,834 102,433,624 25,679,419
NET ASSETS:
Beginning of period....................................... 26,070,834 -- 25,679,419 --
-------------- -------------- -------------- --------------
End of period............................................. $ 13,722,106 $ 26,070,834 $ 128,113,043 $ 25,679,419
============== ============== ============== ==============
Accumulated net investment income (loss) at end of
period................................................. $ 69,644 $ 58,773 $ 885,495 $ (6,707)
============== ============== ============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................... 500,002 -- 500,002 --
Shares sold............................................... 300,000 500,002 2,550,000 600,002
Shares redeemed........................................... (550,000) -- (850,000) (100,000)
-------------- -------------- -------------- --------------
Shares outstanding, end of period......................... 250,002 500,002 2,200,002 500,002
============== ============== ============== ==============
(a) Inception date is consistent with the commencement of investment operations
and is the date the initial creation units were established.
See Notes to Financial Statements Page 27
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FIRST TRUST FIRST TRUST
RIVERFRONT DYNAMIC RIVERFRONT DYNAMIC
EUROPE ETF EMERGING MARKETS ETF
(RFEU) (RFEM)
-------------- -------------- -------------- --------------
SIX MONTHS FOR THE PERIOD SIX MONTHS FOR THE PERIOD
ENDED 4/13/2016 (a) ENDED 6/14/2016 (a)
4/30/2017 THROUGH 4/30/2017 THROUGH
(UNAUDITED) 10/31/2016 (UNAUDITED) 10/31/2016
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss).............................. $ 327,574 $ 452,842 $ 56,200 $ 55,541
Net realized gain (loss).................................. 494,672 960,524 758,728 195,085
Net increase from payment by the advisor ................. -- -- -- --
Net change in unrealized appreciation (depreciation)...... 4,049,219 (849,311) 1,260,931 470,388
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets resulting from
operations............................................. 4,871,465 564,055 2,075,859 721,014
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (24,350) (409,752) (45,485) (54,611)
Net realized gain......................................... (407,052) -- (190,083) --
-------------- -------------- -------------- --------------
Total distributions to shareholders....................... (431,402) (409,752) (235,568) (54,611)
-------------- -------------- -------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold................................. 33,115,640 30,664,176 22,392,212 4,961,180
Cost of shares redeemed................................... (21,634,980) (5,233,560) (5,785,998) --
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets resulting from
shareholder transactions............................... 11,480,660 25,430,616 16,606,214 4,961,180
-------------- -------------- -------------- --------------
Total increase (decrease) in net assets................... 15,920,723 25,584,919 18,446,505 5,627,583
NET ASSETS:
Beginning of period....................................... 25,584,919 -- 5,627,583 --
-------------- -------------- -------------- --------------
End of period............................................. $ 41,505,642 $ 25,584,919 $ 24,074,088 $ 5,627,583
============== ============== ============== ==============
Accumulated net investment income (loss) at end of
period................................................. $ 303,224 $ -- $ 16,886 $ 6,171
============== ============== ============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................... 500,002 -- 100,002 --
Shares sold............................................... 600,000 600,002 400,000 100,002
Shares redeemed........................................... (400,000) (100,000) (100,000) --
-------------- -------------- -------------- --------------
Shares outstanding, end of period......................... 700,002 500,002 400,002 100,002
============== ============== ============== ==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
Page 28 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND III
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP)
SIX MONTHS FOR THE PERIOD
ENDED 4/13/2016 (a)
4/30/2017 THROUGH
(UNAUDITED) 10/31/2016
-------------- --------------
Net asset value, beginning of period ........... $ 52.14 $ 51.31
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 1.15 0.55
Net realized and unrealized gain (loss) ........ 2.47 0.60
---------- ----------
Total from investment operations ............... 3.62 1.15
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.87) (0.32)
---------- ----------
Net asset value, end of period ................. $ 54.89 $ 52.14
========== ==========
TOTAL RETURN (b)................................ 7.07% 2.26%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 13,722 $ 26,071
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets... 0.83% (c) 0.83% (c)
Ratio of net investment income (loss) to
average net assets .......................... 2.10% (c) 1.96% (c)
Portfolio turnover rate (d)..................... 72% 49%
(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.
See Notes to Financial Statements Page 29
FIRST TRUST EXCHANGE-TRADED FUND III
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)
SIX MONTHS FOR THE PERIOD
ENDED 4/13/2016 (a)
4/30/2017 THROUGH
(UNAUDITED) 10/31/2016
-------------- --------------
Net asset value, beginning of period ........... $ 51.36 $ 50.73
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.50 0.83
Net realized and unrealized gain (loss) ........ 6.69 0.50
---------- ----------
Total from investment operations ............... 7.19 1.33
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.08) (0.70)
Net realized gain............................... (0.24) --
---------- ----------
Total distributions ............................ (0.32) (0.70)
---------- ----------
Net asset value, end of period ................. $ 58.23 $ 51.36
========== ==========
TOTAL RETURN (b)................................ 14.06% 2.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 128,113 $ 25,679
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.83% (c) 0.83% (c)
Ratio of net investment income (loss) to
average net assets .......................... 2.75% (c) 2.97% (c)
Portfolio turnover rate (d)..................... 71% 44%
(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 30 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND III
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU)
SIX MONTHS FOR THE PERIOD
ENDED 4/13/2016 (a)
4/30/2017 THROUGH
(UNAUDITED) 10/31/2016
-------------- --------------
Net asset value, beginning of period ........... $ 51.17 $ 50.67
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.48 0.91
Net realized and unrealized gain (loss) ........ 8.50 0.41
---------- ----------
Total from investment operations ............... 8.98 1.32
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.05) (0.82)
Net realized gains.............................. (0.81) --
---------- ----------
Total distributions ............................ (0.86) (0.82)
---------- ----------
Net asset value, end of period ................. $ 59.29 $ 51.17
========== ==========
TOTAL RETURN (b)................................ 17.79% 2.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 41,506 $ 25,585
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.83% (c) 0.83% (c)
Ratio of net investment income (loss) to
average net assets .......................... 2.40% (c) 3.23% (c)
Portfolio turnover rate (d)..................... 77% 41%
(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.
See Notes to Financial Statements Page 31
FIRST TRUST EXCHANGE-TRADED FUND III
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)
SIX MONTHS FOR THE PERIOD
ENDED 6/14/2016 (a)
4/30/2017 THROUGH
(UNAUDITED) 10/31/2016
-------------- --------------
Net asset value, beginning of period ........... $ 56.27 $ 49.61
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.19 0.55
Net realized and unrealized gain (loss) ........ 5.20 6.66
---------- ----------
Total from investment operations ............... 5.39 7.21
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.21) (0.55)
Net realized gain............................... (1.27) --
---------- ----------
Total distributions ............................ (1.48) (0.55)
---------- ----------
Net asset value, end of period ................. $ 60.18 $ 56.27
========== ==========
TOTAL RETURN (b)................................ 9.94% 14.52%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 24,074 $ 5,628
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.95% (c) 0.95% (c)
Ratio of net investment income (loss) to
average net assets .......................... 0.71% (c) 2.66% (c)
Portfolio turnover rate (d)..................... 55% 81%
(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 32 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on January 9,
2008, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust consists of ten funds that are currently offering shares. This report
covers the following funds, each a non-diversified series of the Trust:
First Trust RiverFront Dynamic Asia Pacific ETF - (The Nasdaq Stock Market
LLC ("Nasdaq") ticker "RFAP")
First Trust RiverFront Dynamic Developed International ETF - (Nasdaq
ticker "RFDI")
First Trust RiverFront Dynamic Europe ETF - (Nasdaq ticker "RFEU")
First Trust RiverFront Dynamic Emerging Markets ETF - (Nasdaq ticker
"RFEM")
Each fund represents a separate series of shares of beneficial interest in the
Trust (each a "Fund" and collectively, the "Funds"). Each Fund's shares are
currently listed and traded on Nasdaq. Unlike conventional mutual funds, each
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 in-kind for
securities in which a Fund invests and, in certain circumstances, for cash.
Except when aggregated in Creation Units, the shares are not redeemable
securities of a Fund.
Each Fund is an actively managed exchange-traded fund. The investment objective
of each Fund is to provide capital appreciation.
Under normal market conditions, RFAP seeks to achieve its investment objective
by investing at least 80% of its net assets (including investment borrowings) in
a portfolio of equity securities of Asian Pacific companies through investments
in common stocks, depositary receipts, real estate investment trusts ("REITs"),
and forward foreign currency contracts and currency spot transactions used to
hedge the Fund's exposure to the currencies in which the equity securities of
the Asian Pacific companies are denominated.
Under normal market conditions, RFDI seeks to achieve its investment objective
by investing at least 80% of its net assets (including investment borrowings) in
a portfolio of equity securities of developed market companies through
investments in common stocks, depositary receipts, REITs, and forward foreign
currency contracts and currency spot transactions used to hedge the Fund's
exposure to the currencies in which the equity securities of the developed
market companies are denominated.
Under normal market conditions, RFEU seeks to achieve its investment objective
by investing at least 80% of its net assets (including investment borrowings) in
a portfolio of equity securities of European companies through investments in
common stocks, depositary receipts, REITs, and forward foreign currency
contracts and currency spot transactions used to hedge the Fund's exposure to
the currencies in which the equity securities of the European companies are
denominated.
Under normal market conditions, RFEM seeks to achieve its investment objective
by investing at least 80% of its net assets (including investment borrowings) in
a portfolio of equity securities of emerging market companies through
investments in common stocks, depositary receipts, REITs, and forward foreign
currency contracts and currency spot transactions used to hedge the Fund's
exposure to the currencies in which the equity securities of the emerging market
companies are denominated.
There can be no assurance that a Fund will achieve its investment objective. The
Funds may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds are each considered an investment company and follow accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Funds in the preparation of the
financial statements. The preparation of the financial statements in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
Each Fund's NAV is determined daily as of the close of regular trading on the
New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day
the NYSE is open for trading. If the NYSE closes early on a valuation day, the
NAV is determined as of that time. Foreign securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
Each Fund's NAV is calculated by dividing the value of all assets of each Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
Each Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the 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. Each Fund's investments are valued as
follows:
Common stocks, REITS, 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 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.
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 day during which
investors transact in the shares of a Fund, the value of the Fund's securities
may change on the days when investors are not able to transact in the shares of
the Fund. The value of securities denominated in foreign currencies is converted
into U.S. dollars using exchange rates determined daily as of the close of
regular trading on the NYSE.
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
The Funds are subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value each Fund's investments as of April 30, 2017, is
included with each 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 a Fund's investment in REITs may be comprised of
return of capital, capital gains and income. The actual character of the amounts
received during the year are not known until after the REIT's fiscal year end. A
Fund records the character of distributions received from the REITs during the
year based on estimates available. The characterization of distributions
received by a Fund may be subsequently revised based on information received
from the REITs after their tax reporting periods conclude.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Funds are subject to foreign currency risk in the normal course of pursuing
their 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 Funds use forward foreign currency
contracts to facilitate transactions in foreign securities and to manage foreign
currency exposure. These contracts are valued daily, and each 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 Statements of Assets and Liabilities. The change in unrealized appreciation
(depreciation) is included in "Net change in unrealized appreciation
(depreciation) on forward foreign currency contracts" on the Statements of
Operations. When the forward contract is closed, a 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 Statements of Operations. Risks arise from the possible
inability of Counterparties to meet the terms of their contracts and from
movement in currency, securities values and interest rates. Due to the risks,
the Funds could incur losses in excess of the net unrealized value shown on the
Forward Foreign Currency Contracts table in each Fund's Portfolio of
Investments. In the event of default by the Counterparty, a 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 that
Fund. If a Counterparty becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties, the Funds may experience significant
delays in obtaining any recovery in a bankruptcy or other reorganization
proceeding. The Funds may obtain only limited recovery or may obtain no recovery
in such circumstances. The Funds did not hold any forward foreign currency
contracts at April 30, 2017.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly by
each Fund, or as the Board of Trustees may determine from time to time.
Distributions of net realized capital gains earned by each Fund, if any, are
distributed at least annually.
Distributions from income and 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
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
securities held by the Fund and have no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
The tax character of distributions paid by each Fund during the period ended
October 31, 2016 was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
------------- ------------- -------------
First Trust RiverFront Dynamic Asia Pacific ETF $ 162,451 $ -- $ --
First Trust RiverFront Dynamic Developed International ETF 320,767 30,234 --
First Trust RiverFront Dynamic Europe ETF 344,889 64,863 --
First Trust RiverFront Dynamic Emerging Markets ETF 54,611 -- --
As of October 31, 2016, the components of distributable earnings on a tax basis
for each Fund were as follows:
Accumulated Net
Undistributed Capital and Unrealized
Ordinary Other Appreciation
Income Gain (Loss) (Depreciation)
------------- ------------- -------------
First Trust RiverFront Dynamic Asia Pacific ETF $ 81,895 $ (210,419) $ 542,508
First Trust RiverFront Dynamic Developed International ETF -- 201,934 (437,830)
First Trust RiverFront Dynamic Europe ETF -- 407,064 (828,207)
First Trust RiverFront Dynamic Emerging Markets ETF 213,518 -- 452,885
E. INCOME TAXES
Each Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, each Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of each Fund's taxable income
exceeds the distributions from such taxable income for the calendar year.
The Funds are subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable year ended 2016
remains open to federal and state audit. As of April 30, 2017, management has
evaluated the application of these standards to the Funds, and has determined
that no provision for income tax is required in the Funds' financial statements
for uncertain tax positions.
The Funds intend 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 Funds are 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
Funds had non-expiring capital loss carryforwards for federal income tax
purposes as follows:
Capital
Loss Available
--------------
First Trust RiverFront Dynamic Asia Pacific ETF $ 210,419
First Trust RiverFront Dynamic Developed International ETF --
First Trust RiverFront Dynamic Europe ETF --
First Trust RiverFront Dynamic Emerging Markets ETF --
F. FOREIGN CURRENCY
The books and records of the Funds are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statements of Operations. Unrealized gains and losses on
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statements of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions, and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statements of Operations.
The portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statements of Operations.
G. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
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 are effective for the First Trust funds, including the
Funds, 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
Funds.
I. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Funds, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in each Fund's portfolio, managing the Funds' business affairs and
providing certain administrative services necessary for the management of the
Funds.
Pursuant to the Investment Management Agreement between First Trust and the
Trust, First Trust supervises the investment of the Funds' assets and is
responsible for the expenses of each Fund including the cost of transfer agency,
sub-advisory, custody, fund administration, legal, audit and other services,
including any compensation to Trustees, and excluding fee payments under the
Investment Management Agreement, interest, taxes, brokerage commissions,
acquired fund fees, if any, distribution and service fees payable pursuant to
Rule 12b-1 plan, if any, expenses associated with the execution of portfolio
transactions, and extraordinary expenses, which are paid by each respective
Fund. RFAP, RFDI and RFEU have each agreed to pay First Trust an annual unitary
management fee equal to 0.83% of its average daily net assets. RFEM has agreed
to pay First Trust an annual unitary management fee equal to 0.95% of its
average daily net assets. First Trust also provides fund reporting services to
each Fund for a flat annual fee in the amount of $9,250, which is covered under
the annual unitary management fee.
RiverFront Investment Group, LLC ("RiverFront" or the "Sub-Advisor") serves as
the Funds' sub-advisor and manages each Fund's portfolio subject to First
Trust's supervision. The Sub-Advisor receives a monthly portfolio management fee
calculated at an annual rate of 0.35% of each Fund's average daily net assets
that is paid by First Trust out of its investment advisory fee.
During the six months ended April 30, 2017, RFDI received a payment from the
Advisor of $5,597 in connection with trade errors.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Funds. As
custodian, BBH is responsible for custody of each Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of each Fund's securities and cash. As transfer agent, BBH is
responsible for maintaining shareholder records for each Fund.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
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 six months ended April 30, 2017, the cost of purchases and proceeds from
sales of investments for each Fund, excluding short-term investments and in-kind
transactions, were as follows:
PURCHASES SALES
------------ ------------
First Trust RiverFront Dynamic Asia Pacific ETF $ 18,375,298 $ 10,512,340
First Trust RiverFront Dynamic Developed International ETF 100,853,726 53,356,239
First Trust RiverFront Dynamic Europe ETF 36,005,395 21,866,857
First Trust RiverFront Dynamic Emerging Markets ETF 22,297,322 8,781,202
For the six months ended April 30, 2017, the cost of in-kind purchases and
proceeds from in-kind sales for each Fund were as follows:
PURCHASES SALES
------------ ------------
First Trust RiverFront Dynamic Asia Pacific ETF $ 7,944,448 $ 28,832,014
First Trust RiverFront Dynamic Developed International ETF 89,991,105 46,523,725
First Trust RiverFront Dynamic Europe ETF 16,428,388 19,033,138
First Trust RiverFront Dynamic Emerging Markets ETF 7,547,708 4,704,694
5. DERIVATIVES TRANSACTIONS
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2017, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENTS OF OPERATIONS LOCATION RFAP RFDI RFEU
------------------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward
foreign currency contracts $ (56,848) $ 38,879 $ 259,055
Net change in unrealized appreciation
(depreciation) on forward foreign
currency contracts -- 40,087 57,751
During the six months ended April 30, 2017, the notional values of forward
foreign currency contracts opened and closed were as follows:
Opened Closed
-------------- --------------
RFAP $ 9,254,982 $ 9,254,982
RFDI 80,493,868 87,393,868
RFEU 34,486,864 44,431,864
The Funds do not have the right to offset financials assets and liabilities
related to forward foreign currency contracts on the Statements of Assets and
Liabilities.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Funds 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 each Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities and
other instruments 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 aggregations) 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 BBH, 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 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 Creation Transaction Fee
may increase or decrease as the Fund's portfolio is adjusted to conform to
changes in the composition of the securities included in the Fund's portfolio
and the countries in which the transaction settled. The price for each Creation
Unit will equal the daily NAV per share times the number of shares in a Creation
Unit plus the fees described above and, if applicable, any operational
processing and brokerage costs, transfer fees or stamp taxes. When a Fund
permits an Authorized Participant to substitute cash or a different security in
lieu of depositing one or more of the requisite Deposit Securities, the
Authorized Participant may also be assessed an amount to cover the cost of
purchasing the Deposit Securities and/or disposing of the substituted
securities, including operational processing and brokerage costs, transfer fees,
stamp taxes, and part or all of the spread between the expected bid and offer
side of the market related to such Deposit Securities and/or substitute
securities.
Authorized Participants redeeming Creation Units must pay to BBH, 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 respective Fund's portfolio and the countries in
which the transactions are settled. Each Fund reserves the right to effect
redemptions in cash. An Authorized Participant may request cash redemption in
lieu of securities; however, a Fund may, in its discretion, reject any such
request.
The standard Creation Transaction Fees and the Redemption Transaction Fees for
each Fund are as follows:
Creation Redemption
Transaction Fees Transaction Fees
------------------ ------------------
First Trust RiverFront Dynamic Asia Pacific ETF $ 1,900 $ 1,900
First Trust RiverFront Dynamic Developed International ETF 5,000 5,000
First Trust RiverFront Dynamic Europe ETF 3,500 3,500
First Trust RiverFront Dynamic Emerging Markets ETF 4,100 4,100
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 Funds are
authorized to pay an amount up to 0.25% of their average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Funds, for amounts expended to finance activities primarily intended to result
in the sale of Creation Units or to provide investor services. FTP may also use
this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before February 28, 2018.
8. INDEMNIFICATION
The Trust, on behalf of the Funds, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Funds
through the date the financial statements were issued, and has determined there
were no subsequent events requiting recognition or disclosure in the financial
statements.
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ADDITIONAL INFORMATION
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how each Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Funds' website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of 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 Funds' 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.
RISK CONSIDERATIONS
You could lose money by investing in the Funds. An investment in one of the
Funds 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 each Fund's investment objective will be achieved.
The First Trust RiverFront Dynamic Asia Pacific ETF is more susceptible to the
economic, market, regulatory, political, natural disasters and local risks of
the Asia Pacific region than a fund that is more geographically diversified. The
region has historically been highly dependent on the global trade, with nations
taking strong roles in both the importing and exporting of goods; such a
relationship created a risk with this dependence on global growth. The
respective stock markets tend to have a larger prevalence of smaller companies
that are inherently more volatile and less liquid than larger companies. Varying
levels of accounting and disclosure standards, restrictions on foreign
ownership, minority ownership rights and corporate governance standards are also
common for the region.
The Funds may invest in BDCs. Investments in BDCs may be subject to a high
degree of risk. A BDC's portfolio typically will include a substantial amount of
securities purchased in private placements and, as a result, its portfolio may
carry risks similar to those of a private equity or private debt fund.
Securities that are not publicly registered may be difficult to value and may be
difficult to sell at a price representative of their intrinsic value. In
addition, investments in BDCs are subject to various other risks, including
management's ability to meet the BDC's investment objective and to manage the
BDC's portfolio when the underlying securities are redeemed or sold during
periods of market turmoil and as investors' perceptions regarding a BDC or its
underlying investments change. BDC shares are not redeemable at the option of
the BDC shareholder and they may trade in the secondary market at a discount to
their net asset value. BDCs may also employ the use of leverage in their
portfolios through borrowings or the issuance of preferred stock. Such use of
leverage may subject the BDC to increased risks, including the likelihood of
increased volatility and the possibility that the BDC's common share income may
fall if the interest rate on any borrowings rises. Each Fund will indirectly
bear its proportionate share of any management and other operating expenses, and
of any performance based or incentive fees, charged by the BDCs in which it
invests, in addition to the expenses paid by the Fund.
The First Trust RiverFront Dynamic Emerging Markets ETF may, under certain
circumstances, effect creations and redemptions, in whole or in part, for cash,
rather than in-kind, because of the nature of the Fund's underlying investments.
As a result, an investment in such Fund may be less tax efficient than it would
be through more frequent creations and redemptions in-kind.
Each Fund bears the risk that the counterparty to a Fund's forward foreign
currency exchange contracts and currency spot transactions may default on its
obligations or otherwise fail to honor its obligations. If a counterparty
defaults on its payment obligations, a Fund will lose money and the value of an
investment in Fund shares may decrease. In addition, each Fund may engage in
such investment transactions with a limited number of counterparties.
Credit risk is the risk that an issuer of a security will be unable or unwilling
to make dividend 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.
Each Fund will 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 a
Fund's investments and the value of Fund shares. Changes in currency exchange
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
rates also may affect the value of interest earned and gains and losses realized
on the sale of securities. Currency exchange rates can be very volatile and can
change quickly and unpredictably. As a result, the value of an investment in a
Fund may change quickly and without warning and you may lose money.
Because each Fund's net asset value is determined on the basis of U.S. dollars
and the Funds invest in non-U.S. dollar-denominated 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 a Fund's holdings goes up. Each Fund
may hedge certain of its non-U.S. dollar holdings.
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 shares into
depositary receipts and vice versa. Such restrictions may cause shares of the
underlying issuer to trade at a discount or premium to the market price of the
depositary receipts.
The use of forward contracts and currency spot transactions 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. In
addition to the above risks, each Fund is "deemed" to have entered into an ISDA
Master Agreement (the "ISDA Master Agreement"), a standard umbrella
relationship-framework agreement between two parties under which one or more
individual derivatives transactions are entered. While most ISDA Master
Agreements are highly customized and heavily negotiated, a "deemed" ISDA Master
Agreement has predetermined elections. Therefore, the Funds may forego certain
protections they would have been afforded had they negotiated the ISDA Master
Agreements, such as terms related to choice of law, events of default,
termination events, payments on early termination, and calculation agents.
Each Fund will utilize a dynamic currency hedging strategy and therefore may
have lower returns than an equivalent non-currency hedged investment when the
component currencies are rising relative to the U.S. dollar. As such, contracts
to sell foreign currency will generally be expected to limit any potential gain
that might be realized by a Fund if the value of the hedged currency increases.
In addition, the use of currency hedging will not necessarily eliminate exposure
to all currency fluctuations. Hedging against a decline in the value of a
currency does not eliminate fluctuations in the value of a portfolio security
traded in that currency or prevent a loss if the value of the security declines.
Moreover, it may not be possible for a Fund to hedge against a devaluation that
is so generally anticipated that a Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
Investments in securities and instruments traded in developing or emerging
markets or that provide exposure to such securities or markets can involve
additional risks relating to political, economic or regulatory conditions not
associated with investments in U.S. securities and instruments or investments in
more developed international markets. Emerging market governments may, without
prior warning, impose capital controls on the ability to transfer currency,
securities or other assets. Each Fund's ability to access certain developing or
emerging markets also may be limited due to a variety of factors, including
currency convertibility issues. Such conditions may impact the ability of each
Fund to buy, sell or otherwise transfer securities, cause each Fund's returns to
differ from those available to domestic investors, adversely affect the trading
market and price for Fund shares, and cause each Fund to decline in value.
Because the Funds invest in equity securities, the value of each Fund's shares
will fluctuate with changes in the value of its 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 issuer 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.
Investments in a single region, even though representing a number of different
countries within the region, may be affected by common economic forces and other
factors. The First Trust RiverFront Dynamic Europe ETF is subject to greater
risks of adverse events which occur in the European region and may experience
greater volatility than a fund that is more broadly diversified geographically.
Political or economic disruptions in European countries, even in countries in
which the Fund is not invested, may adversely affect security values and thus
the Fund's holdings. A significant number of countries in Europe are member
states in the European Union (the "EU"), and the member states no longer control
their own monetary policies by directing independent interest rates for their
currencies. In these member states, the authority to direct monetary policies,
including money supply and official interest rates for the Euro, is exercised by
the European Central Bank. Furthermore, the European sovereign debt crisis has
had, and continues to have, a significant negative impact on the economies of
certain European countries and their future economic outlooks.
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
Forward foreign currency exchange contracts involve certain risks, including the
risk of failure of the counterparty to perform its obligations under the
contract and the risk that the use of forward contracts may not serve as a
complete hedge because of an imperfect correlation between movements in the
prices of the contracts and the prices of the currencies hedged. Forward foreign
currency exchange contracts may limit any potential gain that might result
should the value of the underlying currencies increase. In addition, because
forward currency exchange contracts are privately negotiated transactions, there
can be no assurance that each Fund will have flexibility to roll-over a forward
currency exchange contract upon its expiration if it desires to do so. Hedging
against a decline in the value of a currency does not eliminate fluctuations in
the value of a portfolio security traded in that currency or prevent a loss if
the value of the security declines.
Each Fund invests in equity securities that may have limited liquidity despite
being listed on a securities exchange. Equity securities that are less liquid or
that trade less can be more difficult or more costly to buy, or to sell,
compared to other more liquid or active investments. This liquidity risk is a
factor of the trading volume of a particular security, as well as the size and
liquidity of the market for such security. The prices at which the equity
securities are held in the Funds will be adversely affected if trading markets
for the equity securities are limited or absent.
The Funds are subject to management risk because each is an actively managed
portfolio. In managing each Fund's investment portfolio, the Sub-Advisor will
apply investment techniques and risk analyses that may not have the desired
result. There can be no guarantee that each Fund will meet its investment
objective.
Market risk is the risk that a particular security owned by a Fund or shares of
a 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 securities values could decline generally or could underperform
other investments.
The Funds currently have fewer assets than larger funds, and like other
relatively new funds, large inflows and outflows may impact each 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. Also,
during the initial invest-up period, each Fund may depart from its principal
investment strategies and invest a larger amount or all of its assets in cash
equivalents or it may hold cash.
Each Fund is classified as "non-diversified" under the 1940 Act. As a result,
each Fund is only limited as to the percentage of its assets which may be
invested in the securities of any one issuer by the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended. Each Fund may invest a
relatively high percentage of its assets in a limited number of issuers. As a
result, each 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 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.
High portfolio turnover may result in each Fund paying higher levels of
transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause each Fund's performance to be less than
expected.
Preferred stocks combine some of the characteristics of both common stocks and
bonds. Preferred stocks 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 stocks are also subject to credit risk, interest rate
risk and income risk.
In addition to risks related to investments in real estate generally, investing
in REITs involves certain other risks related to their structure and focus,
which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act and, in many cases,
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FIRST TRUST EXCHANGE-TRADED FUND III
APRIL 30, 2017 (UNAUDITED)
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. REITs are also subject to the risk that
the real estate market may experience an economic downturn generally, which may
have a material effect on the real estate in which the REITs invest and their
underlying portfolio securities.
Each Fund may invest in small- and 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.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
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First Trust
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
RiverFront Investment Group, LLC
1214 E. Cary Street
Richmond, VA 23219
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
(a) Schedules of Investments in securities of unaffiliated issuers as of the
close of the reporting period are included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),or
this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3 (c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Not applicable.
(a) (2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a) (3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Exchange-Traded Fund III
-------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2017
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2017
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 20, 2017
-------------------
* Print the name and title of each signing officer under his or her signature.
CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302
OF THE SARBANES-OXLEY ACT
I, James M. Dykas, certify that:
1. I have reviewed this report on Form N-CSR of First Trust Exchange-Traded
Fund III;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to
include a statement of cash flows) of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940) and
internal control over financial reporting (as defined in Rule 30a-3(d)
under the Investment Company Act of 1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of a
date within 90 days prior to the filing date of this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 20, 2017 /s/ James M. Dykas
------------------- ----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302
OF THE SARBANES-OXLEY ACT
I, Donald P. Swade, certify that:
1. I have reviewed this report on Form N-CSR of First Trust Exchange-Traded
Fund III;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to
include a statement of cash flows) of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940) and
internal control over financial reporting (as defined in Rule 30a-3(d)
under the Investment Company Act of 1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of a
date within 90 days prior to the filing date of this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 20, 2017 /s/ Donald P. Swade
------------------- ----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
CERTIFICATION PURSUANT TO RULE 30A-2(B) UNDER THE 1940 ACT AND SECTION 906
OF THE SARBANES-OXLEY ACT
I, James M. Dykas, President and Chief Executive Officer of First Trust
Exchange-Traded Fund III (the "Registrant"), certify that:
1. The Form N-CSR of the Registrant (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Date: June 20, 2017 /s/ James M. Dykas
------------------- ----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
I, Donald P. Swade, Treasurer, Chief Financial Officer and Chief Accounting
Officer of First Trust Exchange-Traded Fund III (the "Registrant"), certify
that:
1. The Form N-CSR of the Registrant (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Date: June 20, 2017 /s/ Donald P. Swade
------------------- ----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
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